Licensing and Imitation in Product-Differentiated Markets Cuihong Fan ∗ June 2002 Abstract The paper examines the optimal license contract with and without imitation, the optimal choice of the quality of licensed technology in product-differentiated markets. Suppose patent disclosure enables imitation, a license contract with a lower fixed fee may discourage imitation. When imitation after licensing may occur, a license contract with a lower royalty rate and a higher fixed fee prevent imitation. Under the threat of imitation, the quality of licensed technology depends on the degree of substitutability of the goods. Keywords: Licensing, imitation, product-differentiation, patent system JEL: L13, O34, D45 ∗ Institute of Economic Theory I, Humboldt-University at Berlin, Spandauer Str. 1, 10178, Berlin, Germany. Email: zzb223@wiwi.hu-berlin.de 1