Revenue Sharing as Compensation for Essential Inputs

Essential inputs are an important topic of debate for economics. One common essential input is intellectual property, in the form of either patents or copyrights, which the producers of goods and services for final consumption must necessarily purchase from the input supplier. The ensuing monopoly power of the input supplier leads in many cases to controversial outcomes, in which social inefficiencies can occur. In much of the literature on the economics of intellectual property, it is assumed that the right holder is remunerated either by a fixed payment or by a payment that amounts to an additional marginal cost to the user, or both. However, in some significant instances in the real-world, right holders are constrained to use (or may choose to use) a compensation scheme that involves revenue sharing. That is, the right holder takes as remuneration a part of the user’s revenue. In essence, the remuneration is set as a tax on the user’s revenue. This paper analyses such remuneration mechanisms, establishing and analysing the optimal tax rate, and also the Nash equilibrium tax rate that would emerge from a fair and unconstrained bargaining problem. The second option provids a rate that may be useful for regulatory authorities.