Creative Destruction and Productive Preemptive Acquisitions

We develop a model of entrepreneurial innovation for entry and sale into oligopolies
suitable for welfare analysis. We show that the expected consumer welfare can be higher
under commercialization by sale than under commercialization by entry despite increased
market power in the product market. The reason is that when the quality of the invention is
sufficiently high, preemptive bidding competition among incumbents drives the acquisition
price above the entry value. Entrepreneurs who sell their inventions will then have a stronger
incentive to develop high-quality inventions than entrepreneurs who aims at entering the
product market. Incumbents are hurt by this creative destruction process ignited by the
entrepreneurs and thus have an incentive to undertake research to block entrepreneurs’
research activities. We show that incumbents’ own research effort can reduce, but not
eliminate, the entrepreneurs’ incentives to innovate for entry or sale.

Keywords: Acquisitions, Entrepreneurship, Innovation, Start-ups, Patent, Ownership,Quality

JEL Classification: G24, L1, L2, M13, O3

Suggested Citation: Suggested Citation

Norbäck, Pehr-Johan and Persson, Lars and Svensson, Roger, Creative Destruction and Productive Preemptive Acquisitions (June 10, 2015). Journal of Business Venturing, Vol. 31(3), pp, 326-43, 2016, Available at SSRN: https://ssrn.com/abstract=1752948 or http://dx.doi.org/10.2139/ssrn.1752948