Essays on patent licensing

We study a process (cost-reducing) innovation by outside innovators. In Chapter 2 we consider we consider the phenomenon where the innovator auctions off his patent rights exclusively to one firm in the industry instead of selling licenses to the firms directly. The winning firm can then sell licenses to other firms. This strategy turns out to be better for the innovator than selling licenses directly for significant innovations. Using this strategy we show that if the industry is not monopolized, an outside innovator has a higher incentive to innovate than an incumbent firm, irrespective of the licensing method. We also show that when the licensing method is restricted to a per unit royalty, the incentive of an outside innovator to innovate depends on the demand structure. As the number of firms in the industry increases, the incentive to innovate increases if the demand is strictly convex, decreases if the demand is strictly concave and does not change if the demand is linear.; In Chapter 3 we analyze the innovators' licensing strategies when competition is foreseen if two innovators invent perfectly substitutional technologies at the same time. We show that even when the innovation is drastic, the innovators collectively will license their technologies to all the firms in the industry and thus induce a perfect diffusion of the new technology.; In the last chapter, we consider the licensing of an outside innovator in heterogeneous industries. We investigate the innovator's best licensing strategy using an auction with fixed fee.