Abstract: A model is developed in which a nonproductive firm decides to license its cost reducing innovation to two firms; these two firms compete with each other on the product market in Stackelberg fashion. It is shown that the optimal choice for patent holder depends on both the licensing contract and the degree of innovation. Specifically, with a fixed-fee contract, the patent holding firm prefers to license its technology to the Stackelberg leader (follower) if the degree of innovation is small (large). With a royalty contract, the patent holder is likely to transfer its technology to two firms. However, with a two-part tariff contract, it is optimal to sell the technology to the market follower. Two-part tariff contract not only produces a maximal licensing profit, but also generates a maximal social welfare, the fact implies that the licensing decision of the patent holder achieves at Pareto optimal.

Key words: technology licensing, licensing choice, Stackelberg competition, social welfare