Technology transfer in spatial competition when licensees are asymmetric

We study technology transfer in a spatial competition with two asymmetric licensees (firms) with an outside innovator who decides how many licenses to offer and the optimal licensing contract. We show the optimal licensing policy is pure royalty contract to both licensees leading to a complete diffusion of the new technology. The result holds irrespective of the cost differentials between the licensees and for innovation of all sizes, that is, drastic or non‐drastic. This robust finding although supports the dominance of royalty licensing in practice; however, consumers may not be necessarily better off. We also throw light on the situation where the innovator sells the patent right to one of the firms. Interestingly, we find that the inefficient firm acquires the new technology and further licenses it to the efficient rival.