DP6823 Entrepreneurial Innovations, Competition and Competition Policy

Author(s): Pehr-Johan Norbäck , Lars Persson

Publication Date: May 2008

Keyword(s): Antitrust , Competition , Competition Policy , Entrepreneurs , Innovations

JEL(s): L13 , L40 , O31

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP6823.asp

We construct a model where an entrepreneur could either innovate for entry or for sale. It is shown that increased product competition tends to increase the relative profitability of innovation for sale relative to entry. Increased competition reduces entrants' and acquirers' profits in a similar fashion, but also reduces the profit of non-acquirers. Therefore, incumbents' valuations of innovations are less negatively affected by increased competition than entrants' profits. This, in turn, implies that the incentive for innovation for sale can increase with increased competition. Finally, we show that a stricter, but not too strict, merger policy tends to increase the incentive for innovations for sale by ensuring the bidding competition for the innovation, without reducing the total rents for innovations too much.