Licensing versus assignment: Innovation transfer in an asymmetric duopoly

Suppose that the relatively inefficient firm in an asymmetric duopoly market develops a nondrastic process innovation. To maximize returns on the innovation, the innovator must determine the most lucrative commercial policy. Should it be in‐house exploitation, or licensing or assignment? It turns out that the innovator never uses innovation exclusively. The choice of licensing or assignment depends on the size of the initial cost difference. When the initial cost difference is relatively small, the innovator would resort to licensing, whereas when there is a significant initial cost gap, the innovator would rather assign the property rights of the innovation to the rival. In the case of assignment, the assignee may license the innovation back to the assignor. With the option of reverse licensing, an assignment will always be more profitable than (direct) licensing. Interestingly, if the initial cost gap were sufficiently large, the innovator would exit the market postassignment, and thus act as an outside nonoperating licensor.