Innovation Licensing Schemes under Asymmetric Information on Technology Quality

An innovation licensor's problem of contracting when the licensor and a potential licensee engage in Cournot competition is studied in this paper. The licensor has a technology innovation that allows reduction of production costs, the magnitude of which is the private information of the licensor. The mode of licensing considered is the general two-part tariff licensing. It is shown that from the perspective of the patent-holding firm, the optimal licensing schemes depend on the actual magnitude of the innovation and the license's prior belief toward the innovation's technology quality. Specifically, for a small innovation, and the licensee believes the magnitude of the innovation is small too, the optimal licensing mode is by pooling contract. For a small innovation, but the licensee believes the magnitude of the innovation is high, the optimal licensing mode is under separating contracts. For the case of a large innovation, the optimal licensing mode is against pooling contract. However, irrespectively of the licensing contracts to offer, licensing by means of a fee and a royalty is superior to using either alone.