Royalty licensing in vertically related markets

We compare two royalty licensing contracts: per-unit and ad valorem in a vertical market. The licensor always prefers a per-unit over an ad valorem royalty contract. Licensing has a greater positive impact on both consumer and total welfare under an ad valorem royalty. • We compare per-unit and ad valorem royalty licensing contracts in a vertical market. • The licensor always prefers the per-unit royalty licensing. • Consumer surplus and total welfare are greater under ad valorem royalty licensing. • Novel results compared to the existing licensing literature in a one-tier market.