Optimal Two‐part Tariff Licensing Mechanisms

Abstract

This paper studies the optimal two‐part tariff licensing contract for an internal patentee in a differentiated C ournot duopoly. We find that the type of the royalty payment, whether ad valorem or per‐unit, that it is optimal for the patentee depends on the kind of goods produced in the industry, more precisely on whether they are substitutes or complements and on the degree of product differentiation. We also find that licensing always increases social welfare, although it may hurt consumers.