Acquisitions, Entry, and Innovation in Network Industries

Lars Persson, Norbäck, Pehr-Johan and Tåg, Joacim
Authors registered in the RePEc Author Service: Pehr-Johan Norbäck and Joacim Tåg

No 9585, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In industries with network effects, incumbents? installed bases create barriers to entry that discourage entrepreneurs from developing new innovations. Yet, entry is not the only commercialization route for entrepreneurs. We show that the option of selling to an incumbent increases innovation incentives for entrepreneurs when network effects are strong and incumbents compete to preemptively acquire innovations. We thus establish that network effects and installed bases do not necessarily restrict innovation incentives. We also show that network effects promote acquisitions over entry and that the entrepreneur has strong incentives to invest in the initial user base of the innovation.

Keywords: Acquisitions; Entry; Network effects; Innovation; R&d (search for similar items in EconPapers)
JEL-codes: L10 L15 L26 L50 O31 (search for similar items in EconPapers)
Date: 2013-08
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