When should a winner take all, or pay some? Innovation and imitation incentives in a dynamic duopoly

Etienne Billette de Villemeur, Richard Ruble and Bruno Versaevel

MPRA Paper from University Library of Munich, Germany

Abstract: We develop a model of investment in duopoly with asymmetric costs of innovating and imitating and endogenous firm roles. Dynamic competition involves either attrition or preemption, the former being likelier with high demand growth and uncertainty. Industry value is maximized when firms neither stall nor hasten entry, and we show that social welfare has local maxima in both the attrition and preemption ranges. In all cases the socially optimal cost of imitation is positive. Attrition is optimal if consumer surplus rises sufficiently under duopoly, whereas with static business-stealing, preemption is optimal if discounting is important enough. Finally we discuss endogenous entry barriers and contracting, finding that firms are more likely to rely on secrecy and patents at low imitation costs and that simple licensing schemes are welfare improving.

Keywords: Dynamic oligopoly; Knowledge spillover; Real options (search for similar items in EconPapers)
JEL-codes: G31 L13 O33 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-ino and nep-mic
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https://mpra.ub.uni-muenchen.de/85823/1/MPRA_paper_85823.pdf revised version (application/pdf)
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https://mpra.ub.uni-muenchen.de/90355/22/MPRA_paper_90355.pdf revised version (application/pdf)

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