Does Microsoft Stifle Innovation? Dominant Firms, Imitation, and R & D Incentives
AbstractWe provide a simple framework to analyze 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). However, the shift in research effort is not one-to-one. The dominant firm's beneffit 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.
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Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 04-16.
Date of creation: 2004
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Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
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Web page: http://w4.stern.nyu.edu/economics/
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Other versions of this item:
- Cabral, Luís M B & Polak, Ben, 2004. "Does Microsoft Stifle Innovation? Dominant Firms, Imitation and R&D Incentives," CEPR Discussion Papers 4577, C.E.P.R. Discussion Papers.
- Luís Cabral & Ben Polak, 2004. "Does Microsoft Stifle Innovation? Dominant Firms, Imitation, and R&D Incentives," Working Papers 06, Portuguese Competition Authority.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
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- Färnstrand Damsgaard, Erika, 2009. "Patent Scope and Technology Choice," Working Paper Series 792, Research Institute of Industrial Economics.
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