This paper analyses an optimal two‐part licensing scheme based on ad valorem royalties within a differentiated Bertrand duopoly where the innovator is also the downstream producer, and compares it with the optimal two‐part per‐unit royalty mechanism. After showing that the optimal two‐part ad valorem licensing scheme reduces to a pure ad valorem royalty scheme, we show that per‐unit contracts are typically preferred to ad valorem contracts by the patentee, as, under price competition, the per‐unit royalty has a stronger strategic effect than the ad valorem royalty. In contrast, welfare is higher under the ad valorem contract than under the per‐unit mechanism.