Abstract
We consider the optimal licensing strategy of an outsider patentee as well as an insider patentee in a linear city framework where firms compete in price. We show that offering royalty is best for an outsider patentee for both drastic and non‐drastic innovations. For an insider patentee, offering no license is the best when the innovation is drastic, while royalty is optimal when the innovation is non‐drastic. The incentive for innovation is higher for an outsider patentee compared to an insider patentee. The overall increase in welfare due to an innovation is the same for both outsider and insider patentees.
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