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Innovation, competition, and incomplete adoption of a superior technology

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  • Luca Sandrini

Abstract

This article shows that competition exerts a feedback effect on market structure via the process of innovation. First, downstream competition increases the willingness to pay for a more efficient technology (the direct effect). Second, a sufficiently large innovation may offer the licensees a robust strategic advantage that forces non-adopters out of business. In turn, this raises the licensee's willingness to pay to survive in the market (the indirect effect). More specifically, if competition is intense, even a tiny innovation may result in drastic effects in the market. This work also demonstrates that royalties do not always imply the complete adoption of a superior technology because of competition's indirect effect on innovation. If granted the possibility of denying access to innovation to some downstream manufacturers, an inventor or rights holder may prefer to license a substantial patent to a subset of manufacturers at a discounted price, regardless of the contract scheme enforced. Finally, this article suggests that a ban on obsolete technology is not welfare-improving from a policy perspective.

Suggested Citation

  • Luca Sandrini, 2023. "Innovation, competition, and incomplete adoption of a superior technology," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 32(6), pages 783-803, August.
    • Handle: RePEc:taf:ecinnt:v:32:y:2023:i:6:p:783-803
    DOI: 10.1080/10438599.2021.2024432
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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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