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Licensing to a More Efficient Rival


  • Fridtjof Anderson

    1. University of Tromsø
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    •  I am most grateful to thank Derek J. Clark, Jan Yngve Sand and an anonymous referee for helpful comments and suggestions. I also thank Anita Michalsen for interesting discussions.


This paper studies licensing of a cost-reducing innovation in an environment with horizontal product differentiation where the licensee is the most efficient firm in absence of the innovation. We derive the optimal two-part tariff and show that when we allow for negative royalty rates, the optimal contract may involve the patentee paying its rival a per-unit subsidy.