ON THE NUMBER OF LICENSES WITH SIGNALLING* by MANEL ANTELO and ANTONIO SAMPAYO † Departamento de Fundamentos da An alise Econ omica, Universidade de San- tiago de Compostela We analyse a two-period licensing game in which a non-producing upstream patent holder licenses an innovation that lasts for two peri- ods to either one or two downstream users. Licensing is made through a payment based on a two-part tariff, namely a fixed fee plus a royalty per output unit. Regarding the innovation value when commercialized by each user (high or low), we compare a symmetric information con- text where such value is publicly known with a situation in which users have private information about the value, but with their period-1 out- put signalling that value. We find that the patent holder is more likely to prefer to grant two licenses under signalling than under symmetric information, which highlights the benefits of resorting to market com- petition between users to reduce the amount of informational rents. 1 INTRODUCTION Consider a non-producing upstream patent holder owning an innovation that lasts for two periods, after which it becomes obsolete and no longer has economic value. Since the patent holder is unable to commercialize the innovation, he is obliged to sell it to just one or several downstream firms capable of making the innovation profitable by developing a new product. In such a context, the licensing literature has shown that, if users have pri- vate information about the economic value of the innovation, the patent holder may sell more licenses than if such value is publicly known (Schmitz, 2002, 2007). What we explore in this paper is whether a similar result would emerge in a signalling scenario, in which each innovation user * Manuscript received 21.10.13; final version received 29.3.16. † We are very grateful to two anonymous referees and the Editor (Chris Orme) whose com- ments and suggestions greatly contributed to improve the manuscript, particularly refer- ring to Propositions 5 and 6. Of course, all remaining errors are our sole responsibility. We acknowledge financial support from the Xunta de Galicia through Project GPC2013-045 partly funded by the European Regional Development Fund. The second author also acknowledges aid received from the Spanish Ministry of Economy and Competitiveness through Research Program ECO2013-48884-C3-1-P. V C 2016 The University of Manchester and John Wiley & Sons Ltd 1 The Manchester School Vol 00 No. 00 00–00 Month 2016 doi: 10.1111/manc.12157