J Econ DOI 10.1007/s00712-014-0421-5 Does two-part tariff licensing agreement enhance both welfare and proﬁt? Arijit Mukherjee · Yingyi Tsai Received: 24 April 2013 / Accepted: 19 September 2014 © Springer-Verlag Wien 2014 Abstract It is general belief that ﬁrm proﬁt is higher under two-part tariff licensing, while social welfare is greater under ﬁxed-fee licensing. We show that this conclusion need not hold when technology transfer is costly and, in particular, when the quality of licensed technology is endogenously chosen. We demonstrate that both social welfare and ﬁrms proﬁt are higher under two-part tariff licensing than they are under ﬁxed- fee licensing. We also show that a higher quality of technology is licensed under the two-part tariff scheme than it is under the ﬁxed-fee licensing contract. Our analysis suggests that both ﬁrms and society may prefer two-part tariff licensing contract under costly technology transfer. This study presents direct contrast result and contributes, therefore, to the extant literature wherein the transfer of technology is costless. Keywords Licensing · Cost of technology transfer · Quality of technology · Welfare JEL Classiﬁcation L13 · L24 · L40 · H25 · D43 A. Mukherjee Nottingham University Business School, Nottingham, UK A. Mukherjee CESifo, Munich, Germany Y. Tsai (B) Department of Applied Economics, National University of Kaohsiung, Kaohsiung, Taiwan e-mail: yytsai@nuk.edu.tw 123