Working Paper: CEPR ID: DP6823
Authors: Pehr-Johan Norbäck; Lars Persson
Abstract: We construct a model where an entrepreneur could either innovate for entry or for sale. It is shown that increased product competition tends to increase the relative profitability of innovation for sale relative to entry. 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 than entrants' profits. This, in turn, implies that the incentive for innovation for sale can increase with increased competition. Finally, we show that a stricter, but not too strict, merger policy tends to increase the incentive for innovations for sale by ensuring the bidding competition for the innovation, without reducing the total rents for innovations too much.
Keywords: Antitrust; Competition; Competition Policy; Entrepreneurs; Innovations
JEL Codes: L13; L40; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased product market competition (L19) | increased relative profitability of innovation for sale (O36) |
| increased product market competition (L19) | decreased incentives for innovations when an entrepreneur commercializes the invention themselves (O31) |
| increased product market competition (L19) | increased incentive to innovate for sale (O31) |
| stricter but not overly strict merger policy (L49) | increased incentive for innovations for sale (O31) |