The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists, and Oligopolists

IUI Working Paper No. 626

IFN Working Paper No. 783

39 Pages Posted: 14 Dec 2004 Last revised: 3 Nov 2014

See all articles by Pehr-Johan Norbäck

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2008

Abstract

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

Suggested Citation

Norbäck, Pehr-Johan and Persson, Lars, The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists, and Oligopolists (December 19, 2008). IUI Working Paper No. 626, IFN Working Paper No. 783, Available at SSRN: https://ssrn.com/abstract=631561 or http://dx.doi.org/10.2139/ssrn.631561

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lars Persson (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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