Insider licensor's licensing strategies under asymmetric information

We examine the insider licensor's optimal licensing strategy and contract under asymmetric information, in which only the licensee owns the cost information post licensing while the licensor has no such information. We obtain the following results. Firstly, the insider licensor may choose to license to only one type of licensee and use the pooling licensing strategy, regardless of the relative marginal cost of the licensee post licensing to that of the licensor. However, the separating licensing strategy can only be used when the marginal cost of the licensee, post licensing, is smaller than that of the licensor. Secondly, when the licensor chooses the pooling licensing strategy, it must adopt a royalty licensing contract and the royalty rate will be greater than the amount of the reduction in the less efficient licensee's marginal cost. Lastly, provided that the licensee's marginal cost post licensing is smaller than that of the licensor and that the licensor chooses to license to only one type of licensee or use the separating licensing strategy, the optimal licensing contract can be royalty, two-part tariff or fixed-fee licensing. The diversity of the optimal licensing contract derived in this paper is consistent with observations in the real world, and is sharply different from the conventional result in which royalty licensing is always superior to fixed-fee licensing for an insider licensor.