There is vast literature on technology transfer of cost reducing innovations through patent licensing in the conventional models of quantity (Cournot) or price (Bertrand) competitions. Relatively, less attention is given on patent licensing in models of spatial competitions. It is a growing area of research and many questions remained unanswered on the nature of licensing contracts and their robustness. In this

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In many markets, we observe scenarios where a firm sometimes pays to acquire new technologies (patents), however, does not use them for its use i.e. shelves them. By shelving the technology, the technology-acquiring firm can prevent its competitor from using it and thus maintain its strategic advantage in the market. We show this happens often when an outside innovator uses exclusive licensing to transfer technology where potential licensees have different efficiency levels of production and have asymmetric absorptive capacities of the transferred technology. However, we also show when this will not happen in the same environment. To this end, we highlight the interplay between strategic effect of the efficient licensee and the cost reduction effect of the inefficient licensee. We find under fixed fee and auction, when the size of innovation is not big, technology is shelved, whereas if the innovation is large, it is not shelved. With per-unit royalty licensing, we find interesting non-monotonicity with respect to shelving and no shelving as the size of the innovation increases. We also find out the optimal licensing contract in this environment and potential welfare loss due to shelving on the society.