In technology-based industries, many incumbent firms license their technology to other firms that will potentially compete with them. Such a strategy is difficult to explain within traditional models of licensing. This paper extends the literature on licensing by relaxing the widespread assumption of a ‘unique’ technology holder. A model is developed with many technological trajectories for the production of a differentiated good. We find that competition in the market for technology induces licensing of innovations, and that the number of licenses can be inefficiently large. A strong testable implication of the theory is that the number of licenses per patent holder decreases with the degree of product differentiation.
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