Environmental technology licensing by an outside innovator in a vertically differentiated duopoly

Environmental technology licensing drives sustainable development by enabling the spread of green innovations to tackle critical environmental challenges. We develop a vertically differentiated duopoly model to investigate the optimal environmental technology licensing strategy of an outside innovator. The outside innovator licenses its advanced or obsolescent environmental technology to two asymmetric potential licensees through auction, fixed-fee or royalty licensing under both exclusive and non-exclusive schemes. The results show that for advanced technology, non-exclusive licensing through royalty is optimal when the level of enhanced environmental quality is small. Otherwise, exclusive licensing to firm 1 through a fixed fee maximizes profit. For obsolescent technology, if environmental quality improvement is large, licensing to firm 2 via fixed fee is more profitable; otherwise, exclusive royalty licensing is chosen. Further, we find that the outside innovator endogenously chooses advanced technology for licensing, which always improves social welfare. For generalization, we extend the study to Bertrand competition and alternative technological path. Our work outlines a decision framework for outside innovators to select the optimal licensing strategy of different quality-improving environmental technologies, offering insights on evaluating licensing contracts with consideration of social welfare consequences.