Does Microsoft Stifle Innovation? Dominant Firms, Imitation and R&D Incentives

Luis Cabral and Ben Polak

No 4577, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We provide a simple framework to analyse 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). The shift in research effort is not one-to-one, however. 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.

Keywords: Innovation; Dominant firm; Imitation; R&d (search for similar items in EconPapers)
JEL-codes: L13 L41 O31 (search for similar items in EconPapers)
Date: 2004-08
New Economics Papers: this item is included in nep-com, nep-ind, nep-ino and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cepr.org/publications/DP4577 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Does Microsoft Stifle Innovation? Dominant Firms, Imitation, and R&D Incentives (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4577

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4577

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().