When does a royalty clause with a guarantee lead to a no‐equilibrium situation in a licensing contract?

We consider a licensing agreement where a brand owner grants to a manufacturer the rights to use his own brand on the goods she produces. The ‘royalty’ clause requires that the licensee pays a monetary compensation for having such property and it generally consists of a percentage of the licensee's sales. Furthermore, a guaranteed minimum royalty, the so‐called guarantee, is also required, and it has to be paid even in the face of total failure of the property.

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