This thesis examines the impact of incorporating an upstream supplier to the outsider patentee’s licensing decision. The basic model includes an outsider patent holder, an upstream supplier providing the intermediate good, and two downstream firms competing in quantity. The outsider patentee can receive profits by means of either fixed fee licensing or royalty licensing. The optimal licensing for the outsider patentee is royalties in both drastic and non-drastic innovation cases. This result compares to Kamien and Tauman (1986) in which without an upstream supplier a fixed fee is always the optimal licensing strategy for an outsider patentee. Besides, the royalty licensing can affectively affect the price setting on the intermediate good, which weakening bargaining power of the upstream supplier.