The Optimal Licensing Strategy of an Outside Patentee in Vertically-Related Markets

We extend the model in Kamien and Tauman (1986) by considering vertically-related markets where the outside innovator transfers new technology by means of either a royalty or a fixed fee. Our conclusion is different with Kamien and Tauman (1986) and announces that the optimal licensing strategy for an outside innovator is a royalty contract with a non-exclusion licensing case. When the innovation size is small, the outside innovator’s licensing behavior causes low social welfare.