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Innovative activity and sunk cost

  • Kaplan, Todd R.
  • Luski, Israel
  • Wettstein, David

We analyze a patent race where the first innovator receives a time-dependent reward while all firms incur costs. When firms are identical, there is a unique, symmetric, mixed-strategy equilibrium that yields zero expected profits for all firms. Furthermore, the expected innovation time is an increasing function of the number of firms and a decreasing function of the size of the reward. When one firm has a higher reward than another, it is more likely to win. Although similar to an all-pay auction, our approach may yield both similar and qualitatively different behavior.

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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 21 (2003)
Issue (Month): 8 (October)
Pages: 1111-1133

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Handle: RePEc:eee:indorg:v:21:y:2003:i:8:p:1111-1133
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. Reinganum, Jennifer R., 1982. "Uncertain Innovation and the Persistence of Monopoly," Working Papers 431, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Denicolo, Vincenzo, 1996. "Patent Races and Optimal Patent Breadth and Length," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 249-65, September.
  3. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  4. Tom Lee & Louis L. Wilde, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, Oxford University Press, vol. 94(2), pages 429-436.
  5. Amann, Erwin & Leininger, Wolfgang, 1996. "Asymmetric All-Pay Auctions with Incomplete Information: The Two-Player Case," Games and Economic Behavior, Elsevier, vol. 14(1), pages 1-18, May.
  6. Osborne, Martin J. & Pitchik, Carolyn, 1983. "Price Competition in a Capacity-Constrained Duopoly," Working Papers 83-08, C.V. Starr Center for Applied Economics, New York University.
  7. Christopher Harris & John Vickers, 1987. "Racing with Uncertainty," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 1-21.
  8. Jennifer F. Reinganum, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 81-99.
  9. F. M. Scherer, 1967. "Research and Development Resource Allocation Under Rivalry," The Quarterly Journal of Economics, Oxford University Press, vol. 81(3), pages 359-394.
  10. Martin, Stephen, 2001. "Industrial Organization: A European Perspective," OUP Catalogue, Oxford University Press, number 9780198297284, December.
  11. Baye, M.R. & Kovenock, D. & De Vries, C.G., 1991. "The All-Pay Auction With Complete Information," Purdue University Economics Working Papers 1007, Purdue University, Department of Economics.
  12. Glenn C. Loury, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 395-410.
  13. Jennifer F. Reinganum, 1981. "On the Diffusion of New Technology: A Game Theoretic Approach," Review of Economic Studies, Oxford University Press, vol. 48(3), pages 395-405.
  14. Robert Vossen, 1999. "Market Power, Industrial Concentration and Innovative Activity," Review of Industrial Organization, Springer, vol. 15(4), pages 367-378, December.
  15. Todd R. Kaplan & David Wettstein, 2000. "The possibility of mixed-strategy equilibria with constant-returns-to-scale technology under Bertrand competition," Spanish Economic Review, Springer;Spanish Economic Association, vol. 2(1), pages 65-71.
  16. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
  17. Vickers, John S, 1986. "The Evolution of Market Structure When There Is a Sequence of Innovations," Journal of Industrial Economics, Wiley Blackwell, vol. 35(1), pages 1-12, September.
  18. Baye, Michael R. & Morgan, John, 1999. "A folk theorem for one-shot Bertrand games," Economics Letters, Elsevier, vol. 65(1), pages 59-65, October.
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