Optimal Licensing of Technology in the Face of (Asymmetric) Competition

Abstract

We reconsider the optimal licensing of technology by an incumbent firm in the presence of multiple potential licensees. In a first step we consider the standard case of one license and show that competition among potential licensees has a drastic effect on optimal two-part tariff contracts. We also consider alternative mechanisms such as standard and more sophisticated menu license auctions, and design a dynamic mechanism that is more profitable. In a second step we allow the licensor to issue more than one license and introduce a globally optimal dynamic mechanism that extracts the maximum industry profit while reducing the potential licensees’ payoff to the minimum level that they can assure themselves. That mechanism awards licenses to all firms and prescribes maximum permitted royalty rates together with positive fixed fees.

Keywords: Patent Licensing, Dynamic Mechanisms, Menu Auctions

JEL Classification: D21, D43, D44, D45