Negative License Fee: A Good or a Bad Deal? A Case of Mixed Technology with Convex Cost

A small difference in the level of initial technology is sufficient for licensing to be profitable between homogeneous duopoly facing constant marginal cost in production. However, firms may not always face linear cost in production. The presence of increasing marginal cost in production has been empirically justified  widely in the past. Owing to innovation, developed country firms may produce all units of output at a lower marginal cost, compared to developing country firms, when firms of both countries are operating with increasing marginal cost in production. Given this context, this chapter finds  the conditions under which licensing of a mixed technology involving a combination of a fixed cost and a marginal cost will become profitable between firms. In line with (Sen, J Ind Compet Trade 15:383–409, 2015), when the cost structure is linear, a negative license deal may be negotiated to gain from licensing, even when from the welfare perspective a technology with features of high marginal cost and low fixed cost is detrimental to the society.