Licensing to a durable-good duopoly

Abstract

Optimally licensing contract are considered for a cost-reducing innovation in a durable-good duopoly for outside innovator. It is shown that (a) license to two firms is better than license to one firm. (b) The licensing contract involving a fixed fee alone can never be optimal in the case of licensing to two firms. (c) when profit opportunities (measured by the ration of the demand and the marginal cost) are large, the optimal licensing contract involves royalty alone regardless the degree of the innovation, while profit opportunities are small, the patent holder employ two-part tariff contract depending on the degree of the innovation and the nature of competition.