Patent licensing in a Cournot oligopoly: general results

This paper presents a comprehensive analysis of patent licensing in a Cournot oligopoly with general demand and looks at both outside and incumbent innovators. The licensing policies considered are upfront fees, unit royalties and combinations of fees and royalties (FR policies). It is shown that (i) royalties unambiguously ensure full diffusion of the innovation while diffusion is limited under upfront fees, (ii) the Cournot price is higher under royalties compared to upfront fees and the price could even exceed the post-innovation monopoly price, (iii) for generic values of magnitudes of the innovation, when the industry size is relatively large, royalties are superior to upfront fees for the innovator and (iv) for any m, there is always a non empty subset of m-drastic innovations such that for relatively large industry sizes, upfront fee policy results in higher consumer surplus as well as welfare compared to both royalty and FR policies.