Related statistical anomalies in the determination of royalty rates : comments on the problem

Abstract

PURPOSE: This study aims at synthesising the impact of the human factor on the occurrence of statistical anomalies in the distribution of the incidence of royalty rates in license contracts. As a research basis for our study we have used the results of two empirical studies on royalty rates in contracts.

DESIGN/METHODOLOGY/APPROACH: The methods used to value intangible rights for licensing purposes should theoretically ensure objectivity. As a result, the analysis of statistical data on the frequency of royalty percentages should provide information on the profitability of licensing specific rights, both in the industry studied and in the economy as a whole. However, statistics of actual royalty rates show an above-average use of some percentage rates (e.g., 5%, 10%) against a relatively low representation of others.

FINDINGS: This paper points to the human factor as the cause of the anomalies found. This influence manifests itself in arbitrary decision-making without economic justification in the valuation process, as well as in the negotiation of royalty rates. The arbitrariness of valuation experts and negotiators, as indicated in the paper, manifests itself primarily in a tendency to round up and rely on numerical schemes.

PRACTICAL IMPLICATIONS: The research we have carried out can contribute to analyses covering the broad spectrum of human factor influences in the royalty valuation and negotiation process.

ORIGINALITY/VALUE: Analysis of the fee for services on statistical anomalies in determining Royalty Rates. The human factor was indicated as the source of these anomalies.