International Journal of Business and Economics Volume 3, No. 1 April​, 2004

Optimal Licensing Strategy: Royalty or Fixed Fee?

Andrea Fosfuri

Department of Business Administration, Universidad Carlos III de Madrid, Spain and CEPR, London, U.K.

Esther Roca

ICADE, Spain

Abstract

Licensing a cost-reducing innovation through a royalty has been shown to be superior to 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 inno-vation to all industry players. If, for any reason, only some competitors could be reached through a licensing contract, then a fixed fee might be optimally chosen.

Keywords：licensing contract, Cournot competition, strategic effects.

JEL Classifications： D45.

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