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http://hdl.handle.net/2451/26035
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| Title: | Dominant Firms, Imitation, and Incentives to Innovate |
| Authors: | Cabral, Luis
Polak, Ben |
| Issue Date: | 13-May-2008 |
| Series/Report no.: | EC-07-06 |
| Abstract: | We provide a simple framework to analyze the effect of firm dominance on
incentives for R&D. An increase in firm dominance, which we measure
by a premium in consumer valuation, increases the dominant firm’s
incentives and decreases the rival firm’s incentives for R&D.
These changes influence the probability of innovation through two ef-
fects: changes in total R&D effort and changes in how this total is
distributed between the two firms. For a given level of total research
effort, the shift from the rival firm to the dominant firm is a good
thing as it decreases the likelihood of duplicate innovation (we call
this the duplication effect). However, the shift in research effort is
not one-to-one. The dominant firm’s benefit from increased
dominance is more inframarginal than marginal when compared to the rival
firm’s disincentive. As a result, total research effort decreases
when firm dominance increases (we call this the total effort effect). We
show the total effort effect dominates the duplication effect when
intellectual property protection is weak, and the opposite when property
rights are strong. That is, firm dominance is good for innovation when
(but only when) property rights are strong. We also examine consumer and
social surplus. |
| URI: | http://hdl.handle.net/2451/26035 |
| Appears in Collections: | Economics Working Papers
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