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Markets for Ideas
Traditional models of innovation: competition
- Start-ups innovate for entry into product markets and displace
incumbents (Gilbert & Newbery, 1981; Reinganum, 1983)
New Models of innovation: competition
- Start-Ups have options to engage in cooperative commercialisation (e.g.,licensing, acquisitions) rather than compete in product markets (Salant,
1982; Gans and Stern, 2000)
- Advantages in saving on duplicative complementary assets (Teece, 1986)or softening of product market competition
2
Markets for IdeasResearch QuestionLiteratureOutline
IntroductionCompetitionCooperation
Conclusion
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Sources of Entrepreneurial Rents
3
Markets for IdeasResearch QuestionLiteratureOutline
Source: Thomson Venture/NVCA
Cooperation withestablished firms
Competition withestablished firms
IntroductionCompetitionCooperation
Conclusion
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Sources of Entrepreneurial Rents
4
Markets for IdeasResearch QuestionLiteratureOutline
Source: Disk Drives, Christensen (1997, p.23)
IntroductionCompetitionCooperation
Conclusion
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New Model: Cooperation (Biotech)
5
Markets for IdeasResearch QuestionLiteratureOutline
IntroductionCompetitionCooperation
Conclusion
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Creation without Destruction?
Competition: Technological entrepreneurship can displaceproduct market incumbents
- Entrepeneurship implies creative destruction
Cooperation: Technological entrepreneurship may reinforceexisting market power
- Entrepreneurship leads to creation but no destruction
Key insight: Competition vs cooperation is not a given but achoice ... the result of negotiations between start-ups and
incumbents.
6
Markets for IdeasResearch QuestionLiteratureOutline
IntroductionCompetitionCooperation
Conclusion
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Research Agenda
Builds on research program with Scott Stern (MIT) and DavidHsu (Wharton) ...
To use insights from bargaining theory to understand thecommercialisation choices entrepreneurial start-ups.
Questions:
-
What are the gains from trade between start-ups and established firms?- What impediments exist that might prevent these gains from being
realised?
- What are the welfare consequences of these choices?
7
Markets for Ideas
Research QuestionLiteratureOutline
IntroductionCompetitionCooperation
Conclusion
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This Paper
Consider a dynamic environment.
Understand whether licensing and acquisitions are likely tooccur in a Schumpeterian environment -- that is, competition forthe market is more important than competition in the market.
Characterise the welfare impact of cooperation -- specificallyon the rate of innovation in the industry.
8
Markets for Ideas
Research QuestionLiteratureOutline
IntroductionCompetitionCooperation
Conclusion
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(Bilateral) Gains from Trade
A start-up firm and an incumbent will trade in ideas markets iftheir joint surplus exceeds their outside options
- Outside options: If the start-up can enter the product market (or dealwith another incumbent), then these are their profits under competition
plus sunk entry costs (Teece, 1986)- Joint surplus: Continuation of incumbent position (plus additional value
of innovation)
- Implies gains from trade: avoiding duplicative investments andsoftening product market competition (Gilbert & Newbery)
Long-run: incumbent need not invest as much in R&D capabilities
- Caveat: ability to generate substitute innovations to dampen start-upbargaining power (Gans & Stern, 2000)
9
Markets for IdeasResearch Question
LiteratureOutline
IntroductionCompetitionCooperation
Conclusion
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Impediments to Ideas Trading
Bargaining inefficiency
- Information asymmetries cause inefficient break-downs or delay -- however,we will see attempted trading.
No gains from trade- There are incomplete contracts implying that continued start-up ownership
and control is important. For example, to facilitate the transfer of tacitknowledge (Arora, 1995).
Strategic bypass
- Negotiations may require disclosures that harm the start-ups competitiveposition (i.e., allowing incumbent imitation); so much so that they avoid the
negotiation option -- Arrows disclosure problem (Anton & Yao, 1994).
10
Markets for IdeasResearch Question
LiteratureOutline
IntroductionCompetitionCooperation
Conclusion
Thursday, 11 March 2010
M k f Idi
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Dynamics and Ideas Markets
Static rationale for cooperative commercialisation is strong
Informal strategic concern (esp in teaching cases)
- EMI & the CT Scanner: licensing would be ... selling our bir thright.
- Nucleon: licensing was viewed as mortgaging away the companys future.
- Ecton: Cannon was also concerned about the impact that an acquisition might have on Ectons productdevelopment process. The Ecton founders were worried that if their company were absorbed into a largerorganization after acquisition, their development efforts for next-generation products would get mired Perhaps, they reasoned, their efforts would be more successful in the long run if they remained independentuntil they had a refined product development process that might survive acquisition and integration.
Informal economic reaction:- No problem. Then start-up should build future losses into the price.
Formal evaluation
- Requires a dynamic model of successive innovation
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Markets for IdeasResearch Question
LiteratureOutline
IntroductionCompetitionCooperation
Conclusion
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M k t f IdI t d ti
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Outline
Set-up dynamic model based on Segal-Whinston (2008)
Equilibrium under competition
Equilibrium under licensing
Equilibrium under acquisition
12
Markets for IdeasResearch QuestionLiterature
Outline
IntroductionCompetitionCooperation
Conclusion
Thursday, 11 March 2010
I t d ti
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Technological Dynamics
Most models of innovation and ideas markets are static
- Roles of firms in an industry is fixed
-
Single innovation race
Dynamics -- on-going innovation races
- Entrants come in and may become incumbents
-
Incumbents protect against entrants- Licensing may preserve roles in equilibrium but not off the equilibrium
path
13
Introduction
CompetitionCooperation
Conclusion
Model Set-UpEquilibriumRestructuring
Thursday, 11 March 2010
Introduction
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Segal-Whinston (AER, 2008)
Model of dynamic technological competition
- SW apply to antitrust practices
- SW consider entrants as competing and displacing incumbents -- on-going change
Here, modifications
- Remove static competition effects to focus on dynamics in
Schumpeterian, winner-take-all or for the market competition.
- Incorporate ideas markets
- Model dynamic capabilities (firms may not be long-lived)
14
Model Set-UpEquilibriumRestructuring
Introduction
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Introduction
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Firms & Innovations
Discrete time, infinite horizon with common discount factor,
Innovations are sequential- Innovation yields new product of higher quality than previous generation
Incumbent (I)
- There is a single producer of the new product who can earn per period monopolyrents,, until displaced.
Innovation leader
- For each product generation only one firm conducts R&D- Innovation leader drawn from pool of firms including the current incumbent
(ODonoghue, Scotchmer and Thisse, 1998)
- I can be the innovation leader and prolong incumbency
- Otherwise, label leader as entrant orE.
15
Model Set-UpEquilibriumRestructuring
Introduction
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Introduction
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Innovation Rate
16
Model Set-UpEquilibriumRestructuring
Introduction
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Introduction
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Innovation Rate
16
InnovationLeaderchosen
Model Set-UpEquilibriumRestructuring
Introduction
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Introduction
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Innovation Rate
16
InnovationLeaderchosen
E
Model Set-UpEquilibriumRestructuring
Introduction
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Introduction
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Innovation Rate
16
InnovationLeaderchosen
Choose
E[,1]E
Model Set-UpEquilibriumRestructuring
Introduction
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Introduction
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Innovation Rate
16
InnovationLeaderchosen
Choose
E[,1]E
I
Model Set-UpEquilibriumRestructuring
Introduction
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
M d l S UIntroduction
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Innovation Rate
16
InnovationLeaderchosen
Choose
E[,1]
Choose
I [,1]
E
I
Model Set-UpEquilibriumRestructuring
t oduct o
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
M d l S t UIntroduction
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Innovation Rate
16
InnovationLeaderchosen
Choose
E[,1]
Choose
I [,1]
No cost to R&D
E
I
Model Set-UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
M d l S t UIntroduction
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Innovation Rate
16
InnovationLeaderchosen
Choose
E[,1]
Choose
I [,1]
E= 1
No cost to R&D
E
I
Model Set-UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set UpIntroduction
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Innovation Rate
16
InnovationLeaderchosen
Choose
E[,1]
Choose
I [,1]
E= 1
I=
No cost to R&D
E
I
Model Set-UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set UpIntroduction
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Commercialisation Choices
17
Model Set-UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
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Model Set UpIntroduction
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Commercialisation Choices
17
EntrantInnovates
Model Set-UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
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Model Set-UpIntroduction
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Commercialisation Choices
17
EntrantInnovates
Competition
Model Set-UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
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Model Set-UpIntroduction
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Commercialisation Choices
17
EntrantInnovates
I loses
monopoly
profits
Competition
Model Set-UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
C i i
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Commercialisation Choices
17
EntrantInnovates
I loses
monopoly
profits
CompetitionE
becomes I
(earns )
Model Set UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
C titi
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Commercialisation Choices
17
EntrantInnovates
I loses
monopoly
profits
Competition
Cooperation
E
becomes I
(earns )
Model Set UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
C titi
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Commercialisation Choices
17
EntrantInnovates
I loses
monopoly
profits
Competition
Cooperation
E
becomes I
(earns )
Iretainsmonopolyprofits
Model Set UpEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
Competition
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Commercialisation Choices
17
EntrantInnovates
I loses
monopoly
profits
Competition
Cooperation
E
becomes I
(earns )
Iretainsmonopolyprofits
EremainsE
(earns )
pEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
Competition
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Dynamic Capabilities
18
pEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
Competition
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Dynamic Capabilities
18
Prior Activity
pEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
Competition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
pEquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
Competition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
EquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
Competition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
Production &Innovation
EquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpIntroduction
Competition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
Production &Innovation
Example
EquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpE ilib i
IntroductionCompetition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
Production &Innovation
Example
I not an
innovation leader
EquilibriumRestructuring
CompetitionCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpE ilib i
IntroductionCompetition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
Production &Innovation
Example
I not an
innovation leader
E as innovation
leader
EquilibriumRestructuring
Co pet t oCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpE ilib i
IntroductionCompetition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
Production &Innovation
Example
I not an
innovation leader
E as innovation
leader
Merger orI as
innovation leader
EquilibriumRestructuring
pCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpE ilib i
IntroductionCompetition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
Production &Innovation
Example
I not an
innovation leader
E as innovation
leader
Merger orI as
innovation leader
Probability ofbecoming Leader
EquilibriumRestructuring
pCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
Production &Innovation
Example
I not an
innovation leader
E as innovation
leader
Merger orI as
innovation leader
Probability ofbecoming Leader
p [0,1]
EquilibriumRestructuring
pCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
Production &Innovation
Example
I not an
innovation leader
E as innovation
leader
Merger orI as
innovation leader
Probability ofbecoming Leader
p [0,1]
i[0,1]
EquilibriumRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
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Dynamic Capabilities
18
ProductionOnly
Prior Activity
InnovationOnly
Production &Innovation
Example
I not an
innovation leader
E as innovation
leader
Merger orI as
innovation leader
Probability ofbecoming Leader
p [0,1]
i[0,1]
ip max{
p,
i}
EquilibriumRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
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Competition
19
EquilibriumRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
C
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Competition
19
InnovationLeader
EquilibriumRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
C i
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Competition
19
InnovationLeader
I
EquilibriumRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
C ti
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Competition
19
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
I
EquilibriumRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
C ti
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Competition
19
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
ResearchStage
I
Iearns and chooses
I in each period until
innovates
qRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
Cooperation
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Competition
19
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
ResearchStage
I
Iearns and chooses
I in each period until
innovates
qRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
Cooperation
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Competition
19
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
ResearchStage
I
E
Iearns and chooses
I in each period until
innovates
or
qRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
Cooperation
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Competition
19
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
ResearchStage
I
E E acquires innovationcapability and Iacquires production
capability
Iearns and chooses
I in each period until
innovates
or
qRestructuring
CooperationConclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
Cooperation
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Competition
19
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
ResearchStage
I
E E acquires innovationcapability and Iacquires production
capability
Iearns and chooses
I in each period until
innovates
Iearns and Echooses E in each
period until innovates
or
RestructuringCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
Cooperation
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Competition
19
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
ResearchStage
I
E E acquires innovationcapability and Iacquires production
capability
Iearns and chooses
I in each period until
innovates
Iearns and Echooses E in each
period until innovatesE replaces I
CompetitionStage
or
RestructuringCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibrium
IntroductionCompetition
Cooperation
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Competition
19
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
ResearchStage
I
E E acquires innovationcapability and Iacquires production
capability
Iearns and chooses
I in each period until
innovates
Iearns and Echooses E in each
period until innovatesE replaces I
CompetitionStage
or
RestructuringCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumR i
IntroductionCompetition
Cooperation
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Continuation Payoffs
20
VE= (1
E)V
E+
E( +
iV
I
i+ (1
i)V
I)
VI= (1
E)( + V
I) +
E
pV
E
VIi
= (1 I)( + VIi
) +I( +ipVIi
+ (1ip )VI)
RestructuringCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumR i
IntroductionCompetition
Cooperation
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Incentives to Innovate
21
RestructuringCooperation
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumR t t i
IntroductionCompetition
Cooperation
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Incentives to Innovate
21
E
Restructuringp
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumR t t i
IntroductionCompetition
Cooperation
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Incentives to Innovate
21
+
iV
I
i+ (1
i)V
I V
EE
Restructuringp
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumRestructuring
IntroductionCompetition
Cooperation
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Incentives to Innovate
21
+
iV
I
i+ (1
i)V
I V
E
I
E
Restructuringp
Conclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumRestructuring
IntroductionCompetition
Cooperation
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Incentives to Innovate
21
+
iV
I
i+ (1
i)V
I V
E
(1
ip)(V
I
iV
I)I
E
RestructuringConclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumRestructuring
IntroductionCompetition
Cooperation
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Incentives to Innovate
21
+
iV
I
i+ (1
i)V
I V
E
(1
ip)(V
I
iV
I)I
E E= 1
RestructuringConclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumRestructuring
IntroductionCompetition
Cooperation
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Incentives to Innovate
21
+
iV
I
i+ (1
i)V
I V
E
(1
ip)(V
I
iV
I)I
E E= 1
I=
RestructuringConclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumRestructuring
IntroductionCompetition
CooperationC
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Markov perfect equilibrium
22
VE=
1
c
1 (1) + (i
ip)( )
VI =1
c 1 (1) + (i ip )( )
p
V
I
i=
1
c
1 2 1(1ip)
i( )p( )
c= 1 (1 ) (
ip+ ((1 (1
i) + (1
ip))
p)
RestructuringConclusion
Thursday, 11 March 2010
Model Set-UpEquilibriumRestructuring
IntroductionCompetition
CooperationC l i
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Restructuring & Spin-Outs
Would an incumbent innovation leader spin-out its innovating arm?
Not worthwhile if ...
23
VI
i VI +VE1(1ip ) i +p
... but spin-outs are always socially desirable asentrants innovate more than incumbents
RestructuringConclusion
Thursday, 11 March 2010
LicensingRestructuringAcquisition
IntroductionCompetition
CooperationC l i
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Licensing
24
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
ResearchStage
I
EE
acquires innovationcapability and I
acquires production
capability
Iearns and chooses
I in each period until
innovates
Iearns and Echooses E in each
period until innovates
or
AcquisitionConclusion
Thursday, 11 March 2010
LicensingRestructuringAcquisition
IntroductionCompetition
CooperationC l i
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Licensing
24
I acquires innovation
and production
capabilities
InnovationLeader
CapabilitiesStage
ResearchStage
I
EE
acquires innovationcapability and I
acquires production
capability
Iearns and chooses
I in each period until
innovates
Iearns and Echooses E in each
period until innovatesEnegotiates with I
NegotiationStage
or
qConclusion
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CooperationConclusion
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Negotiations
25
+pV
I
i+ (1
p)V
I+ +
iV
E
Joint Payoff from Cooperation
pVE + +iVIi + (1i )VI
Joint Payoff from Competition
(
p
i) V
I
iV
EV
I( ) 0
qConclusion
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CooperationConclusion
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Continuation Payoffs
26
VE= (1
E)V
E+
E(+
iV
E)
VI= + (1
E)V
I+
E(+
pV
I
i )
VIi
= (1 I)( + VIi
) +I( +ipVIi
+ (1ip )VI)
qConclusion
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CooperationConclusion
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Markov Perfect Equilibrium
27
(p i ) 1 (1ip ) i p( ) 0
Licensing is the unique equilibrium outcome if ...
max
+
pV
I
i+ (1
p)V
I
pV
E( )1
+ iV
E ( +
iV
I
i+ (1
i)V
I)( )
E= 1
I=
qConclusion
Thursday, 11 March 2010
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CooperationConclusion
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Licensing Equilibrium Outcomes
28
ip
ip
p
i
LicensingLicensing
Competition
CompetitionVI
iV
I+V
E
VI
i
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Licensing Equilibrium Outcomes
28
ip
ip
p
i
LicensingLicensing
Competition
CompetitionVI
iV
I+V
E
VI
i
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Intuition
29
VI
iV
I+V
EIf want an incumbent innovator
p>
i achieve that by keeping I as incumbent (Licensing)
p<
i achieve that by making E the incumbent (Competition)
VI
i
i achieve that by making E the incumbent (Competition)
p < i achieve that by keeping I as incumbent (Licensing)
But welfare maximised by always maximising chancefor entrant innovator
Conclusion
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RestructuringAcquisition
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CooperationConclusion
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Restructuring
30
ip
ip
p
i
Licensing
no gainsfrom trade
Restructuring
CompetitionVI
iV
I+V
E
VI
i
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Negotiations
31
+ipV
I
i+ (1
ip)V
I+
Joint Payoff from Cooperation
pVE + +iVIi + (1i )VI
Joint Payoff from Competition
Conclusion
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Acquisition
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CooperationConclusion
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Negotiations
31
+ipV
I
i+ (1
ip)V
I+
Joint Payoff from Cooperation
pVE + +iVIi + (1i )VI
Joint Payoff from Competition
(
ip
i
)(VI
iV
I
) p
VE
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Acquisition
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CooperationConclusion
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Negotiations
31
+ipV
I
i+ (1
ip)V
I+
Joint Payoff from Cooperation
pVE + +iVIi + (1i )VI
Joint Payoff from Competition
(
ip
i
)(VI
iV
I
) p
VE
1
ip> 1
i
p
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Acquisition
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CooperationConclusion
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Negotiations
31
+ipV
I
i+ (1
ip)V
I+
Joint Payoff from Cooperation
pVE + +iVIi + (1i )VI
Joint Payoff from Competition
(
ip
i
)(VI
iV
I
) p
VE
1
ip> 1
i
p
implies positive externality onpotential entrants
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Acquisition
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CooperationConclusion
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Continuation Payoffs
32
VE= (1
E)V
E+
E
VI= + (1
E)V
I+
E(+
ipV
I
i )
VIi
= (1 I)( + VIi
) +I( +ipVIi
+ (1ip )VI)
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Acquisition
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CooperationConclusion
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Markov Perfect Equilibrium
33
Thursday, 11 March 2010
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Acquisition
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CooperationConclusion
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Markov Perfect Equilibrium
33
E= 1
I=
Thursday, 11 March 2010
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Acquisition
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CooperationConclusion
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Markov Perfect Equilibrium
33
ip
i
p1 (1 )(1
ip)( ) 0
Acquisition is the unique equilibrium outcome if and only if ...
E= 1
I=
Thursday, 11 March 2010
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Acquisition
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CooperationConclusion
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Markov Perfect Equilibrium
33
ip
i
p1 (1 )(1
ip)( ) 0
Acquisition is the unique equilibrium outcome if and only if ...
E= 1
I=
Sufficient condition:
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Acquisition
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CooperationConclusion
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Markov Perfect Equilibrium
33
ip
i
p1 (1 )(1
ip)( ) 0
Acquisition is the unique equilibrium outcome if and only if ...
E= 1
I=
ip
i+
pSufficient condition:
Thursday, 11 March 2010
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Acquisition
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CooperationConclusion
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Acquisition Equilibrium Outcomes
34
ip
ip
p
i
Acquisition
Competition
VI
iV
I+V
E
VI
i
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Welfare
Acquisition never socially desirable
Significant: commentators suggest that Schumpeterian
competition implies loose merger policy
Here: merger consolidates capabilities to become next leadinnovator in incumbents hands (removes entrant capabilities) --
with reduced innovation incentives.
Merger delays forces of creative destruction
35
Thursday, 11 March 2010
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Acquisition
IntroductionCompetition
CooperationConclusion
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Licensing & Acquisition
36
ip
ip
p
i
Licg
Licensing
Competition
Compn
VI
iV
I+V
E
VI
i
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Extensions
R&D Costs
- Would change little but if rates of innovation the same, the incentive touse negotiations to increase likelihood of incumbent innovator isremoved.
Product market competition
- Increases (static) drivers for licensing
- Licensing involves additional welfare costs
Multiple innovators
- Incumbent still has lower incentives to innovate so conclusion unchanged
37
Thursday, 11 March 2010
Extensions
Future Directions
IntroductionCompetitionCooperation
Conclusion
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Future Directions
38
Thursday, 11 March 2010
Extensions
Future Directions
IntroductionCompetitionCooperation
Conclusion
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Future Directions
Endogenise capability acquisition
38
Thursday, 11 March 2010
Extensions
Future Directions
IntroductionCompetitionCooperation
Conclusion
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Future Directions
Endogenise capability acquisition
Impact of other anti-trust practices under licensing
38
Thursday, 11 March 2010
Extensions
Future Directions
IntroductionCompetitionCooperation
Conclusion
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Future Directions
Endogenise capability acquisition
Impact of other anti-trust practices under licensing
Richer space of strategic variables