Optimal Licensing Strategy: Royalty or Fixed Fee?

Abstract

Licensing a cost-reducing innovation through a royalty has been shown to be superior to_x000D_ licensing by means of a fixed fee for an incumbent licensor. This note shows that this result relies crucially on the assumption that the incumbent licensor can sell its cost-reducing innovation to all industry players. If, for any reason, only some competitors could be reached_x000D_ through a licensing contract, then a fixed fee might be optimally chosen.