This paper analyses the optimal licensing strategy of a licensor firm that competes with potential licensee firms in an industry with endogenous entry. The optimal licensing strategy of the licensor firm is to have zero royalty and positive fixed fees, which is a result that sharply contrasts with the existing literature whereby licensor firms tend to charge positive royalties to their rival licensees. Under the optimal licensing strategy, the licensor firm and the licensee firms are active in the market, but not the non‐licensed firms. This equilibrium market structure is socially desirable if the fixed production cost is not too small.