Optimal licensing with equity

The existing literature for an insider patentee indicates that the optimal licensing contract is royalty licensing under Bertrand competition. This paper explores licensing by means of royalty licensing and equity licensing in a Hotelling linear city model. Given a covered market, this paper shows that the insider patentee would like to choose equity licensing when the transport rate relative to the innovation size is large, while selecting royalty licensing otherwise. Next, provided that the market is uncovered post licensing, this paper finds that equity and fixed-fee licensing are indifferent to the patentee and are both superior to royalty licensing.