Screening vs. signaling in technology licensing

Resumo

A patent holder owning a two-period lasting innovation is unable to push it into the market, so it is licensed to a downstream user with production capabilities to market it. The production cost of this firm can be low or high, but the patent holder has only a prior on this fact. To discover the patent value, it may design a separating or a signaling short-run licensing contract. In the first case, the contract of period 1 includes a fixed fee for the efficient user and a two-part contract for the inefficient user; in the second, it consists of a fixed fee alone for both types of user. From the patent holder's viewpoint, a screening contract is better than a signaling contract only when the user is likely to become inefficient in marketing the innovation and the cost difference is not very high. Otherwise, a signaling contract is preferred. Hence, the coexistence of the different licensing schemes observed in practice can be rationalized by the use of different devices (screening or signaling) aimed at alleviating the effects of opportunistic behavior. From a social perspective, although screening is generally superior to signaling to extract hidden information—signaling is preferred to screening under certain conditions.