Timing of technology adoption in the presence of patent licensing

This research analyzes the incentives for a firm to license a cost-reducing technology and the determinants of a fixed fee using a dynamic insider licensing model with continuous time. We find when product substitutability or innovation size is relatively low that the licensor (innovator) sets a fixed fee that is a little bit high, making the licensor itself the leader in adopting the new technology, but not too high, making the licensee still willing to accept the licensing contract and behave as the follower in adopting the new technology. It is better for both the licensor and the licensee to accept the licensing contract, which is a win-win situation, than for no licensing to occur both in the case of fixed-fee licensing with differentiated products and in the case of unit-royalty licensing with homogeneous products.