Dominant Firms, Imitation, and Incentives to Innovate

Stern School of Business Working Paper No. EC-07-06

28 Pages Posted: 14 May 2007

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Ben Polak

Yale University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2007

Abstract

We provide a simple framework to analyze the effect of firm dominance on incentives for R&D. An increase in firm dominance, which we measure by a premium in consumer valuation, increases the dominant firm's incentives and decreases the rival firm's incentives for R&D. These changes influence the probability of innovation through two effects: changes in total R&D effort and changes in how this total is distributed between the two firms.

For a given level of total research effort, the shift from the rival firm to the dominant firm is a good thing as it decreases the likelihood of duplicate innovation (we call this the duplication effect). However, the shift in research effort is not one-to-one. The dominant firm's benefit from increased dominance is more inframarginal than marginal when compared to the rival firm's disincentive. As a result, total research effort decreases when firm dominance increases (we call this the total effort effect).

We show the total effort effect dominates the duplication effect when intellectual property protection is weak, and the opposite when property rights are strong. That is, firm dominance is good for innovation when (but only when) property rights are strong. We also examine consumer and social surplus.

Suggested Citation

Cabral, Luis M. B. and Polak, Benjamin, Dominant Firms, Imitation, and Incentives to Innovate (January 1, 2007). Stern School of Business Working Paper No. EC-07-06. Available at SSRN: https://ssrn.com/abstract=985607 or http://dx.doi.org/10.2139/ssrn.985607

Luis M. B. Cabral (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

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HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Benjamin Polak

Yale University - Department of Economics ( email )

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New Haven, CT 06520-8268
United States
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203-432-5779 (Fax)

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