We consider the issue of patent licensing in a linear city framework where firms are located at the end points of the city and compete in price. We consider three types of licensing arrangements, namely, auction, fixed fee, royalty; and focus on the optimal licensing strategy of an outsider patentee as well as an insider patentee. Contrary to the findings in the existing literature, first we show offering royalty is the best for the patentee when the patentee is an outsider for both drastic and non-drastic innovation. For insider patentee, offering no-license is the best when the innovation is drastic, while royalty is optimal when the innovation is non-drastic. We find incentive for innovation is higher for an outsider patentee compared to an insider patentee. We also show that overall increase in welfare due to innovation is independent of the fact that the patentee is outsider or insider in each of the drastic and non-drastic case.
