Chapter 11 Patent licensing This chapter focuses on the patent licensing. Game theoretic methods have made it possible to address questions with regard to patent licensing. The common modes of patent licensing are a royalty possibly nonuniform per unit of output produced with the patented technology a fixed fee that is independent of the quantity produced with the patented technology or a combination of a fixed fee plus a royalty. The patentee can choose which of these modes of licensing to employ and how to implement them. The interaction between a patentee and licensees is described in terms of a three stage noncooperative game. The licensees are assumed to be members of an n firm oligopoly producing an identical product. Entry into the industry is assumed to be unprofitable i.e. the cost of entry exceeds the profits an entrant could realize. The firms in the oligopoly can compete either through quantities or prices. The industrys aggregate output and product price is determined by the Cournot equilibrium in the former case and the Bertrnd equilibrium in the latter. In the simplest version of the game the oligopoly faces a linear demand function for its product. The patented invention reduces the cost of production i.e. it is a process innovation. Licensing of a product innovation can also be analyzed in this game theoretic framework. The chapter discusses the licensing by means of an auction fixed fee licensing of a cost reducing innovation and then of a new product licensing by means of a royalty fixed fee plus royalty licensing optimal licensing mechanism or the chutzpah mechanism and patent licensing in the presence of Bertrand competition.