Optimal Licensing Strategy of Patent holding Firm

In this paper we study the optimal patent licensing strategy where an inside (incumbent) patent holder and the potential entrant are different in marginal cost. We find that patent licensing strategy depend not only on the market demand but also on the marginal cost of licensee. Under asymmetric costs in production, we show that the royalty rate does not always dominate the fixed fee licensing for an inside patentee. We also discuss how to charge the optimal licensing fee which includes fixed fee and royalty rate, and present the value of patent licensing.