Creative destruction and productive preemption (original) (raw)

Creative Destruction and Productive Preemptive Acquisitions

Journal of Business Venturing, 2016

We develop a model of entrepreneurial innovation for entry and sale into oligopolies suitable for welfare analysis. We show that the expected consumer welfare can be higher under commercialization by sale than under commercialization by entry despite increased market power in the product market. The reason is that when the quality of the invention is sufficiently high, preemptive bidding competition among incumbents drives the acquisition price above the entry value. Entrepreneurs who sell their inventions will then have a stronger incentive to develop high-quality inventions than entrepreneurs who aims at entering the product market. Incumbents are hurt by this creative destruction process ignited by the entrepreneurs and thus have an incentive to undertake research to block entrepreneurs' research activities. We show that incumbents' own research effort can reduce, but not eliminate, the entrepreneurs' incentives to innovate for entry or sale.

Entrepreneurial innovations, competition and competition policy

European Economic Review, 2012

We construct a model where an entrepreneur could innovate for entry or for sale. It is shown that increased product market competition tends to increase the relative profitability of innovation for sale. Increased competition reduces entrants' and acquirers' profits in a similar fashion, but also reduces the profit of non-acquirers. Therefore, incumbents' valuations of innovations are less negatively affected by increased competition, and the incentive for innovation for sale can increase with increased competition. Moreover, a stricter, but not too strict, merger policy is shown to increase the incentive for innovations for sale by ensuring the bidding competition for the innovation.

Patent Protection, Startup Takeovers, and Open Innovation

International Journal of The Economics of Business, 2019

Open-innovation largely relies on startup innovators transferring their R&D to incumbent firms. Yet such innovators are at a disadvantage when faced with incumbents holding patent portfolios, raising the question why do such Lilliputian firms choose to innovate? In view of this we study the impact of patent protection on the innovation incentives of startup firms in a dynamic model where an incumbent faces a sequence of potential startups and the incumbent's chance of winning an infringement lawsuit increases with the size of its patent portfolio. It is shown that open-innovation style takeover deals generate extra benefits for the incumbent via its enhanced future bargaining positions, a part of which accrues to the current startup as an increased bargaining share, justifying R&D activity that would not have taken place otherwise.

Preemptive Patenting and the Persistence of Monopoly

American Economic Review, 1982

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Entrepreneurial innovation, patent protection and industry dynamics

2010

We assess the effects of intellectual property (IP) protection in a dynamic model in which the value of IP engendered by innovative entrepreneurs gets eroded by subsequent imitators and innovators, and imitation has pro-competitive effects. We find that welfare and innovation are maximized with zero protection against further innovation and, conditional on this, with full protection against imitation. However, if some protection against innovation is unavoidable, allowing for some imitation may be socially beneficial. These results are robust to endogenizing imitation and get reinforced when entrepreneurs are financially constrained.

The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists, and Oligopolists

Journal of the European Economic Association, 2009

We construct a model where incumbents can either acquire basic innovations from entrepreneurs, or wait and acquire developed innovations from entrepreneurial firms supported by venture capitalists. We show that venture-backed entrepreneurial firms have an incentive to overinvest in development vis à vis incumbents due to strategic product market effects on the sales price of a developed innovation. This will trigger preemptive acquisitions by incumbents, thus increasing the reward for entrepreneurial innovations. We also show that venture capital can emerge in equilibrium if venture capitalists have cost advantages, or if development is associated with double moral hazard problems.

Preemptive acquisition and downgrading innovation

Research papers on innovation activity share the view that whenever an invention is made available by a startup innovator, getting its ownership by acquisition is beneficial for incumbent firms. In this note, I show by means of an example that there are some circumstances in which accomodating entry and competing with the innovator in the product market can be substantially more profitable than blocking her entry via acquisition.

Incumbency and R&D incentives: Licensing the gale of creative destruction

2000

Abstract: We analyze the relationship between incumbency and innovative activity in the context of a model of technological competition in which successful entrants are able to license their innovation to (or be acquired by) an incumbent. That such a sale ought to take place is natural since the post-innovation monopoly profits are greater than the sum of duopoly profits. The possibility of licensing leads to four key results.

Product innovation and market acquisition of firms

2010

The paper explores the incentives for an incumbent firm to acquire an entrant willing to sell a product innovation, rather than openly compete with this entrant and, in case of acquisition, the incentives to sell simultaneously both the existing products and the new one, rather than specializing on a single variant. We prove that, in some circumstances, an incumbent firm can find it profitable to make an acquisition proposal to the entrant in order to deter entry. Nevertheless, in this acquisition scenario, a product proliferation strategy is never observed at equilibrium. Rather, the incumbent restricts itself to offer either its own variant or the product innovation produced by the entrant, depending on the quality differential existing between them. It follows that, while being available for sale, sometimes the innovation simply remains unexploited ABSTRACT The paper explores the incentives for an incumbent …rm to acquire an entrant willing to sell a product innovation, rather than openly compete with this entrant and, in case of acquisition, the incentives to sell simultaneously both the existing products and the new one, rather than specializing on a single variant. We prove that, in some circumstances, an incumbent …rm can …nd it pro…table to make an acquisition proposal to the entrant in order to deter entry. Nevertheless, in this acquisition scenario, a product proliferation strategy is never observed at equilibrium. Rather, the incumbent restricts itself to o¤er either its own variant or the product innovation produced by the entrant, depending on the quality di¤erential existing between them. It follows that, while being available for sale, sometimes the innovation simply remains unexploited a .