Per-unit versus ad-valorem royalty licensing in a Stackelberg market

We consider licensing of a non-drastic innovation by a patentholder who interacts with a potential licensee in a Stackelberg duopoly. We compare per-unit and ad-valorem royalty contracts, showing why and when each licensing deal should be observed. We find that ad-valorem royalty is preferred by a licensor that plays as the leader, but per-unit royalty is more profitable if the licensor is the follower. We also find that only innovations that do not hurt consumers are socially beneficial. Finally, licensor’s leadership or followership and innovation size determine licensing impact on the incentive to disseminate an innovation.