Negotiating for the Market

Abstract:     
In a dynamic environment where underlying competition is 'for the market,' this paper examines what happens when entrants and incumbents can negotiate for the market. For instance, this might arise when an entrant innovator can choose to license to or be acquired by an incumbent firm; i.e., engage in cooperative commercialization. It is demonstrated that, depending upon firms' dynamic capabilities, there may or may not be gains to trade between incumbents and entrants in a cumulative innovation environment; that is, entrants may not be adequately compensated for losses in future innovative potential. This stands in contrast to static analyses that overwhelmingly identify positive gains to trade from such cooperation. It is also demonstrated that, in this environment, firms may have incentives to license or not precisely adverse to the welfare benefits of such actions and that acquisition is always socially undesirable.

Keywords: innovation, incumbency, dynamic capabilities, licensing, mergers, commercialization

JEL Classifications: O31

Working Paper Series