Experimental Use Licensing with Non-drastic Innovation∗ Suggested running head: Experimental Use Licensing

We use a duopoly model of non-drastic innovation with production differentiation to examine the sequential pricing and simultaneous purchase decisions of an experimental use license in a three-stage game. In equilibrium, the technologically advantaged firm will purchase a license while the technologically disadvantaged does not (regardless of the order of pricing decisions). While efficiency requires both to purchase a license, this can only occur if the firm’s products have identical initial quality. Efficient sharing of intellectual property in R&D will occur if a research exemption is granted.