On patent licensing in spatial competition with endogenous location choice

Using a standard linear city model with two firms, we consider how their licensing activities following their R&D investments affect the locations of the firms and the effort levels of the R&D investments. Although recent studies show that R&D investments that may cause a large cost differential between firms yield agglomeration of the firms, we show that licensing activities after R&D investments always lead to the maximum differentiation between the firms and mitigate the price competition. We also show that those licensing activities induce the socially optimal effort levels of R&D activities.