Sale versus licensing of a quality-enhancing innovation by an outside patentholder

We examine an outside patentholder’s choice between selling and licensing a quality-enhancing (product) innovation to a duopoly in which firms compete by setting quantities or prices. While outright sale (assignment) transfers ownership, licensing, whereby the patentholder retains the patent’s ownership, occurs by means of contracts that combine a fixed fee and per-unit or ad-valorem royalty. Under Cournot (quantity-setting) competition, the patentholder prefers to sell the innovation (to a single firm that further licenses it to its market competitor), rather than license it. Relative to the pre-transfer scenario, sale-based transfer increases overall welfare, although it may harm consumers. Furthermore, the fact that licensing may be societally superior to assignment leaves room for public regulation in the field of technology transfer. Under Bertrand (price-setting) competition, outright sale and licensing are interchangeable transfer methods, but the innovation is only transferred to a single firm. This has an impact on the welfare comparison between the Cournot and Bertrand competition models. • An outside patentholder wants to sell or license a product innovation. • Under Cournot competition, the patentholder prefers to sell the innovation. • Sale-based transfer increases overall welfare, although it may harm consumers. • Once the innovation is transferred, Cournot welfare can exceed Bertrand welfare.