The owner of a well known fashion brand grants a manufacturer the rights to produce and sell a second-line brand against a percentage of the sales called royalty. To this end, the brand owner and the manufacturer sign a licensing contract which assigns the owner, who has already determined his advertising campaign, the right of determining the royalty factor. | Yugoslav Journal of Operations Research 26 (2016), Number 3, 263–278 DOI: ENDOGENOUS ROYALTY FACTOR IN A LICENSING CONTRACT Alessandra BURATTO Department of Mathematics, University of Padova, Italy buratto@ Luca GROSSET Department of Mathematics, University of Padova, Italy grosset@ Bruno VISCOLANI Department of Mathematics, University of Padova, Italy viscolani@ Received: January 2015 / Accepted: May 2015 Abstract: The owner of a well known fashion brand grants a manufacturer the rights to produce and sell a second-line brand against a percentage of the sales called royalty. To this end, the brand owner and the manufacturer sign a licensing contract which assigns the owner, who has already determined his advertising campaign, the right of determining the royalty factor. The manufacturer will plan her advertising campaign for the licenced product in order to maximize her profit. The brand owner’s objective is twofold: on the one hand, he wants to maximize the profit coming from the contract, on the other hand, he wants to improve the value of the brand at the end of a given planning period. We model this interaction between the two agents using a Stackelberg game, where the brand owner is the leader and the manufacturer is the follower. We characterise the royalty percentage and the licensee’s advertising effort which constitute the unique Stackelberg equilibrium of the game. Keywords: OR in Marketing, Licensing, Advertising, Stackelberg Game. MSC: 90B60, 49N90, 91A65. 264 A. Buratto, L. Grosset, B. Viscolani / Licensing Contract 1. INTRODUCTION Licensing contracts are widely used marketing tools that allow the involved firms to obtain a variety of benefits, such as increased revenues, new market penetration, and reposition of the brand. Raugust warns [19, p. 9] “. parties should also be aware of the risks and challenges.” Kotler et al. [14, p. 577] write “. some companies license names or .
