When an outside innovating firm has a technology to produce a higher quality good than the good produced at present, it can sell licenses of its technology to incumbent firms using a combination of royalty and fixed fee, or enter the market with or without license. We examine credibility of threat of entry of the innovating firm using a two-step auction in an oligopoly under vertical product differentiation. The credibility of threat of entry by two-step auction depends on the form of the cost function of the new technology, whether it is concave or convex.