Technology Licensing Contracts and R&D in Duopoly

This paper examines technology licensing contracts and R&D investment in an industry with Cournot competition. We compare two licensing contracts, that is, fixed fee and royalty contracts. Specifically, we analyze a game in which in the first stage, a patent holding firm offers a licensing contract to its rival firm, the rival firm accepts or rejects the contract in the second stage, the two firms determine R&D investment in the third stage and in the fourth stage the two firms play Cournot competition in the product market. We derive subgame perfect equilibrium for the game and compare equilibrium profits under the two licensing schemes. We also examine a setting where the firms' R&D investments have spillover effects.