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Sequential Innovation, Naked Exclusion, and Upfront Lump-Sum Payments

34 Pages Posted: 8 May 2017  

Jay Pil Choi

Michigan State University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Christodoulos Stefanadis

University of Piraeus

Date Written: April 04, 2017

Abstract

We present a potentially benign naked exclusion mechanism that can be applied to sequential innovation; a non-patentable original innovation by the incumbent supplier fosters derivative innovation by rivals. In the absence of an appropriate legal framework, the original innovator’s equilibrium exclusivity contracts block subsequent efficient entry even if there is (leader-follower) competition in the contracting phase. However, the legal framework may maximize social welfare by imposing a ban on upfront lumps-sum payments in exclusivity contracts (by all suppliers) combined with an outright ban on exclusivity contracts by the derivative innovator. The former ban precludes the exclusion of socially beneficial derivative innovation by causing the incumbent supplier to resort to accommodation, rather than to pure exclusion, strategies. The latter ban complements the former by preventing inefficient or excessive derivative innovation.

Keywords: exclusivity, entry, fixed cost, lump-sum payment, sequential innovation

JEL Classification: L420, D430, D450

Suggested Citation

Choi, Jay Pil and Stefanadis, Christodoulos, Sequential Innovation, Naked Exclusion, and Upfront Lump-Sum Payments (April 04, 2017). CESifo Working Paper Series No. 6412. Available at SSRN: https://ssrn.com/abstract=2964788

Jay Choi (Contact Author)

Michigan State University - Department of Economics ( email )

101 Marshall Hall
East Lansing, MI 48824
United States
517-353-7281 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Christodoulos Stefanadis

University of Piraeus ( email )

80 Karaoli and Dimitriou
Piraeus, 18534
Greece

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