The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists, and Oligopolists
IUI Working Paper No. 626
39 Pages Posted: 14 Dec 2004 Last revised: 3 Nov 2014
Date Written: December 19, 2008
We construct a model where incumbents can either acquire basic innovations from entrepreneurs, or wait and acquire developed innovations from entrepreneurial firms supported by venture capitalists. We show that venture-backed entrepreneurial firms have an incentive to overinvest in development vis-a-vis incumbents due to strategic product market effects on the sales price of a developed innovation. This will trigger preemptive acquisitions by incumbents, thus increasing the reward for entrepreneurial innovations. We also show that venture capital can emerge in equilibrium if venture capitalists have cost advantages, or if development is associated with double moral hazard problems.
Keywords: Acquisitions, Entrepreneurship, Innovation, Venture Capital
JEL Classification: G24, L10, L20, M13, O30
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