Optimal Licensing Schemes For A Patent In A Cournot Oligopoly And A Monopoly Market

Transforming the scientific achievements into productive forces is a fundamental policy of our country. Making over and licensing of R&D technique and achievements is beneficial either to licensee and patentee, or to society as a whole. But how to maximize the payoff of each side, or say, how to find an equilibrium in the licensing process is a standard principle-agent problem. In practice, patent licensing by means of a combination of upfront fee and royalty is one of the most commonly observed licensing policies. The theoretical literature on patent licensing has mainly considered three methods of licensing: by means of royalty, upfront fee and auction. This paper attempts to fill the gap in the literature by considering optimal combinations of royalty with either upfront fee or auction. Further, we carry out the analysis for two possible scenarios: the innovator is an outsider to the industry and an incumbent producer. For both cases, we characterize the optimal licensing policies and discuss their impact on the price and the structure of the market, payoffs of the agents. It can be showed that the consumers are better off, firms are worse off and the welfare is increased due to the innovation. The post-innovation price and payoff of any firm is higher with an incumbent innovator. An incumbent innovator sells the license to every firm. This is true for an outsider innovator only for less significant innovation, while for significant innovation, the license is sold to only two firms and a natural duopoly is created. The private value of the patent is increasing in the magnitude of the innovation for both types of innovators.