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How the sunk costs of incumbents make entrants important for innovation: a model and implications for policy

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  • Dimitry Rtischev

Abstract

The paper clarifies how sunk costs can lead a rational incumbent to innovate less than an entrant. It also demonstrates that competition among incumbents yields less adoption of new and more efficient production technology than competition which includes entrants. The results suggest that policy promoting adoption of next-generation production technology should distinguish among firms based on their sunk costs in current-generation technology and encourage entry by industry outsiders such as startups or firms from other industries.

Suggested Citation

  • Dimitry Rtischev, 2016. "How the sunk costs of incumbents make entrants important for innovation: a model and implications for policy," Gakushuin Economic Papers, Gakushuin University, Faculty of Economics, vol. 52(4), pages 175-188.
    • Handle: RePEc:abc:gakuep:52-4-2
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    File URL: http://www.gakushuin.ac.jp/univ/eco/gakkai/pdf_files/keizai_ronsyuu/contents/contents2015/5204/5204rtischev/5204rtischev.pdf
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    More about this item

    Keywords

    cost-reducing innovation; R&D competition; sunk costs; entry; innovation policy;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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