Bargaining and delay in patent licensing

We consider a model for licensing a non-drastic innovation in which the patent holder (an outside innovator) negotiates either up-front fixed fees or per-unit royalties with two firms producing horizontally differentiated brands and competing `a la Cournot. We investigate how licensing schemes (fixed fee or per-unit royalty) and the number of licenses sold (exclusive licensing or complete technology diffusion) affect price agreements and delays in reaching an agreement.We show that, under complete information, the patent holder prefers to license by means of upfront fixed fees whatever the degree of product differentiation, the innovation size and the level of bargaining power. Once there is private information about the relative bargaining power of the parties, the patent holder may prefer licensing by means of per-unit royalties even if market competition is strong. Moreover, the delay in reaching an agreement is greater whenever the patent holder chooses to negotiate up-front fixed fees instead of per-unit royalties.