International Journal of Business and Economics

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
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.