In this paper we derive the optimal two‐part tariff contract for the licensing of a cost‐reducing innovation to a differentiated goods industry of a general size. We analyze the cases where the patentee is an independent laboratory or an incumbent firm. We show that, regardless of the number of firms, the degree of product differentiation and the type of patentee, the innovation is licensed to all firms. Moreover, we endogenize research and development (R&D) investment and obtain that an internal patentee invests more (less) in R&D when the technological opportunity is low (high), which is supported by an empirical test using data on R&D expenditures of Spanish manufacturing firms.