Working Paper: CEPR ID: DP9585
Authors: Pehr-Johan Norbäck; Lars Persson; Joacim TG
Abstract: In industries with network effects, incumbents? installed bases create barriers to entry that discourage entrepreneurs from developing new innovations. Yet, entry is not the only commercialization route for entrepreneurs. We show that the option of selling to an incumbent increases innovation incentives for entrepreneurs when network effects are strong and incumbents compete to preemptively acquire innovations. We thus establish that network effects and installed bases do not necessarily restrict innovation incentives. We also show that network effects promote acquisitions over entry and that the entrepreneur has strong incentives to invest in the initial user base of the innovation.
Keywords: acquisitions; entry; innovation; network effects; R&D
JEL Codes: L10; L15; L26; L50; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong network effects (D85) | increased innovation incentives (O31) |
| strong network effects (D85) | heightened competition among incumbents to acquire innovations (O36) |
| heightened competition among incumbents to acquire innovations (O36) | increased innovation incentives (O31) |
| strong network effects (D85) | promote acquisitions over entry (G34) |
| strong network effects (D85) | increased preemptive bidding among incumbents (D44) |
| increased preemptive bidding among incumbents (D44) | enhanced acquisition price and rewards for entrepreneurs (L26) |
| strong network effects (D85) | dual positive effect on acquisition prices (G19) |