Article ID: | iaor20138 |
Volume: | 58 |
Issue: | 12 |
Start Page Number: | 2251 |
End Page Number: | 2271 |
Publication Date: | Dec 2012 |
Journal: | Management Science |
Authors: | Xu Yi, Xiao Wenqiang |
Keywords: | marketing |
This paper investigates the impact of royalty revision on incentives and profits in a two‐stage (research and development (R&D) stage and marketing stage) alliance with a marketer and an innovator. The marketer offers royalty contracts to the innovator. We find that the potential for royalty revision leads to more severe distortions in the optimal initial royalty contracts offered by the marketer. We show that if the innovator plays a significant role in the marketing stage, the marketer should offer a low royalty rate initially and then revise the royalty rate up later. Otherwise, she should do the opposite. We identify two major effects of royalty revision. First, royalty revision provides the marketer with a flexibility to dynamically adjust royalty rates across the two stages of the alliance to better align the innovator's incentives. This