Optimal patent licensing—Two or three‐part tariff

Abstract We look into technology transfer by an insider patentee in a spatial duopoly model under three types of licensing contracts—(i) two‐part tariff with fixed fee and per‐unit royalty, (ii) ad‐valorem royalty (iii) general three‐part fee, royalties. Under contracts, the licenser is better off contract but does than other contracts. In contrast to existing literature, all contracts may make consumers worse‐off compared no licensing, lowest consumer surplus achieved contract. Welfare equal welfare it higher lower royalty. Hence, privately optimal not socially optimal. Similar conclusions hold also nonspatial linear demand differentiated products.