Matthew Mitchell (Rotman School of Management, University of Toronto)

Pricing and Perpetual Royalties with Repeated Resale

Abstract. This paper considers a durable object that is repeatedly resold bilaterally. The results highlight differences between contracting environments which have become practical as record keeping technologies improve. When each owner sets a price unilaterally, trade is reduced relative to one time sales. Fixed royalties to the prior owner, mandated in some countries, are counterproductive: they lower the prior owner’s value. A dynamic contract that maximizes profits for the first owner achieves efficiency in all but the first sale, without achieving full surplus extraction. It can be interpreted as nonlinear perpetual royalties, which have been discussed especially in digital art markets.