Licensing a capacity-increasing innovation

The paper explores optimal licensing strategies for a capacity-increasing innovation in a Cournot duopoly with firms having asymmetric capacity constraints. When the innovation is invented by an outside innovator, the choice of licensing scheme determines which firm gets the technology. In an auction, the firm with a higher initial capacity wins the license. In a unit royalty scheme, if the initial capacity difference is large, the firm with a lower initial capacity gets it; otherwise, both firms get the license. Comparing different licensing schemes, including pre-set fees, auctions, per-unit royalties and two-part tariffs, the optimal choice for the innovator is to auction one exclusive license. However, when the innovation emerges from within the duopoly, it is used solely by the incumbent innovator without being licensed to the competitor.