Licensing a standard: fixed fee versus royalty

This paper explores how an inventor should license an innovation that opens new markets for the licensees. Using a model incorporating product differentiation and network externalities we show that fixed fee licenses are optimal either when there is little competition downstream or when it is desirable to restrict entry. By opposition, royalty based licensesallo wsfor more downstream firms (thanks to higher prices) and lead to a revenue which is less sensitive to more product homogeneity. They are optimal when downstream entry is desirable, which occurs either because there are positive network externalities, or for some intermediate values of product differentiation.