The technology licensing literature has completely dominated by the assumption of constant returns to scale technology, while the implications of convex costs have been discussed extensively in the Industrial Organization literature or in the Microeconomics literature, in general. We show that an “outside innovator” and the society may prefer royalty licensing compared to auction (or fixed-fee licensing) under convex costs. There can also be conflicting interests between the innovator and the society about the preferred licensing contract. However, the consumers always prefer auction. It follows from our analysis that a combination of royalty and fixedfee can dominate both auction (of fixed-fee licensing) and royalty only licensing.
