This paper studies whether an outside patent holder prefers to license its Quality-improving innovation as an external patentee or to merge with one of the firms by Stackelberg duopoly model. The findings are that, if the degree of innovation is high, the patent holder prefers vertical merger, and the new firm composed by the patent holder and the follower prefers licensing by means of a per-unit royalty to ad valorem royalty. Secondly, the paper finds if the degree of innovation is low, the patent holder directly licenses as an external patentee. Finally, the paper finds vertical merger benefits consumers, while licensing decreases consumer surplus, as contradicts our government preference for technology licensing.