Licensing with Patent Competition

Abstract

We consider licensing with a patent competition for a non-drastic process innovation among firms competing in a Cournot market. We study whether licensing improves social welfare, after taking rent dissipation into account. For licensing auction, welfare worsens for minor innovations and improves for major innovations. For royalty licensing, welfare does not change. Surprisingly, when the licensor may choose between licensing auction and royalty licensing, licensing fails to improve welfare in general.