Does licensing improve welfare with rent dissipation?

Licensing generally improves welfare as markets become competitive with technology diffusion. However, as licensing increases the value of a patent, the welfare gain may be offset by increased rent dissipation from additional overlapping research efforts. We consider Cournot oligopolists engaging in a patent competition for a cost-reducing innovation where the competition's winner may license the patent to its rivals. We show that although licensing always increases the incentive to innovate, it may reduce welfare for minor innovations but generally does not improve welfare for major ones. Our result is consistent with recent policy reforms that patent protection should focus on major innovations.