Licensing Contracts: Control Rights and Options

• Main Authors: CRAMA, Pascale, DE REYCK, Bert, TANERI, Niyazi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Operations and Supply Chain Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3263; https://ink.library.smu.edu.sg/context/lkcsb_research/article/4262/viewcontent/Operations_20Management_20Summer_20Camp_202012.pdf
• Institution: Singapore Management University

The rise of the open innovation paradigm creates the opportunity and need for research and development (R&D) collaborations. R&D collaboration, however, can be challenging to manage because of the high degree of technical and market uncertainty as well as the difficulty in measuring research effort. We investigate how the contracts between the innovating parties structure the R&D collaboration and jointly optimize the payment terms and launch control rights, to offer the correct incentives to the innovator and the marketer. We find that the nature of the impact of the research effort matters as milestone payments are not always effective in encouraging research effort. To improve the effectiveness of milestones, it can be optimal for the innovator to grant the launch control right to the marketer to create a credible threat that marginally profitable research outcomes will not be launched. Adding flexibility to the contracts refines these results. First, buy out contracts allow to grant launch control to the marketer while still launching all profitable outcomes. Second, allowing the parties to renegotiate the contract after observing the outcome of the research phase further increases the contract value and can often achieve first-best.