This paper studies the question of optimal licensing contract in a leadership structure when the patent holder of a superior technology is itself a competitor in the product market. The size of the innovation is assumed to be exogenous. It is then shown that which firm (whether leader or follower) owns the patent and what contracts are available to the inventor, have different implications to the consumers and producers separately and as a whole. We examine whose innovation is socially more valuable. Given private incentives of innovation, an appropriate licensing policy can induce the desired firm to win the patent race.

This paper studies the question of optimal licensing contract in a leadership structure when the patent holder is a non-producer. We assume that the size of the innovation is exogenous and the patent holder has three alternative licensing strategies, viz., fee, royalty and auction. We show that when the innovation is small, royalty dominates other contracts. But for larger innovations while fee dominates royalty, auction is the equilibrium decision. Depending on the size of the innovation the license is given either to leader or to follower or to both. Hence identity of the licensee becomes an important variable.

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