Patent Licensing in a Leadership Structure

The question of an optimal licensing contract in a leadership structure is studied when the patent holder is a non-producer and has three alternative licensing strategies, namely fixed fee, royalty and auction. Assuming once-for-all licensing contracts, we show that royalty dominates other modes when the innovation is small. For larger innovations, while fee dominates royalty, auction is the equilibrium decision. In our analysis, the identity of the licensee, whether a leader or a follower, is important. We also discuss the problem when there is a threat of offering a second licensing contract