Quality-improving licensing of an outside innovator in a mixed Cournot duopoly

This paper proposes a mixed Cournot duopoly model with private and partially public firms to study an outside innovator's optimal licensing strategy. The innovator decides how and to whom it licenses its quality-improving innovation. We uncover three main findings. First, constrained to exclusive contracts, fixed-fee licensing to the public firm is always optimal. Second, constrained to non-exclusive contracts, fixed-fee licensing outperforms royalty licensing when the innovation size and the private share of the public firm are sufficiently large. Finally, if the innovator can freely decide on contracting exclusivity, fixed-fee licensing to the public firm emerges as the optimal choice. This result holds even when exclusive auction and two-part tariffs are available. We further examine social welfare effects, determining that a conflict regarding contracting exclusivity may arise between the innovator and the state.