The article explores how licensing of technology between companies affects competition and product quality. The study shows that when an entrant licenses technology from an incumbent, it can lead to softer competition. The impact on the entrant's product quality depends on how much better its technology is compared to the incumbent's. If the entrant's technology is significantly better, licensing can improve product quality. However, if the technology only offers small improvements, licensing may lower product quality. Different licensing contracts can be beneficial for both parties, even if the entrant pays less in royalties than it would for research and development. These findings hold true even when the incumbent sets the royalty fee.