Settlement 2 Sample Clauses

Settlement 2. A specific (per unit) royalty In this case, we consider a settlement in which the entrant pays the patentee a per unit royalty. We first outline the model in which the per unit royalty is fixed at a certain level, regardless of the quantity sold by the entrant (i.e., the royalty = aqE, where a is a parameter); we refer to such a royalty as a one-tier per unit royalty. We then outline another version of the model, the version mentioned in the text, in which the per unit royalty increases once the entrant’s quantity exceeds a certain threshold; we call that structure a two-tier per unit royalty. THE ONE-TIER PER UNIT ROYALTY If the parties decide to settle, they compete as Cournot duopolists, taking account of the effect of the royalty on their profits. The formal solution of the model is, of course, very similar to the solution of the Cournot model in Scenario 2 of the Litigation outcome (see note 29 and the previous section of the text). THE PATENTEE’S PROBLEM P The patentee chooses qs to maximize  s   p  c  q  aq   p  1 q  aq ,

Settlement 2. The two-tier per unit royalty Alternatively, suppose the settlement includes a two-tier per unit royalty of the sort considered in Settlement 2, with the following parameter values:   2 K  1, 000 cP  1 a  0 b  0.07 q  200 If prices are denominated in thousands of dollars, those parameter values correspond to the last example cited in the text: royalty-free sales of the first 200 units, with royalties of $70 per unit for any additional units sold. For those parameter values, in equilibrium, qE does exceed q , so the entrant does pay a two-tier royalty, and both parties prefer settlement to litigation. Expected consumer surplus under litigation, however, is actually higher than consumer surplus in the settlement equilibrium. Thus, as indicated in the text, although the parties would prefer to settle, settlement will actually harm consumers. Note also that for some parameter values there is no one-tier per unit royalty that both parties would prefer to litigation.33 To effect a settlement that both parties—and consumers—prefer to litigation, therefore, a two-tier royalty or some other royalty structure may be necessary.