Working Paper: CEPR ID: DP16151
Authors: Sandro Shelegia; Massimo Motta
Abstract: An incumbent monopolist may prevent a firm which currently sells a complementary product from developing a substitute, by copying its product. Imitation reduces the potential rival's current profits, making it less likely for it to obtain funding in the financial market.The anticipation of the incumbent's aggressive behaviour may also create an "ex ante" effect, by inducing the rival not to challenge the incumbent with a substitute (that is, not to enter the "kill zone") and develop another complement instead. Further, in this case the incumbent will have an incentive not to copy, since a new complement will raise its rents.The possibility of being acquired by the incumbent tends to push the rival towards developing a substitute rather than a complement. By choosing the former, potential gains from the acquisition are created (in the form of suppression of competition): as long as the rival has some bargaining power in the determination of the takeover price, it will then benefit from entering the "kill zone".
Keywords: innovation; copying; platforms
JEL Codes: L12; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Incumbent's copying (Y20) | Reduction in rival's profits (D43) |
| Reduction in rival's profits (D43) | Decreased likelihood of obtaining funding (G32) |
| Incumbent's copying (Y20) | Decreased likelihood of obtaining funding (G32) |
| Possibility of acquisition (F35) | Shift in rival's development strategy (O39) |
| Shift in rival's development strategy (O39) | Development of a substitute (O39) |