Welfare reducing licensing

In this paper, we characterize situations where licensing an innovation to a rival ...rm using two-part tari¤ contracts (a ...xed fee plus a linear per unit of output royalty) reduces social welfare. We show that it occurs if and only if i) the goods are close enough substitutes, ii) the innovation is large enough but not drastic and iii) the ...rms compete in prices. Moreover, we show that, regardless of the type of competition, ...rst, the optimal contract always includes a positive royalty and, second, even drastic innovations are licensed whenever the goods are not homogeneous.