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Entry and Patenting in the Software Industry

  • Iain M. Cockburn

    ()

    (Boston University, Boston, Massachusetts 02215; and National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Megan J. MacGarvie

    ()

    (Boston University, Boston, Massachusetts 02215; and National Bureau of Economic Research, Cambridge, Massachusetts 02138)

To what extent are firms kept out of a market by patents covering related technologies? Do patents held by potential entrants make it easier to enter markets? We estimate the empirical relationship between market entry and patents for 27 narrowly defined categories of software products during the period 1990-2004. Controlling for demand, market structure, average patent quality, and other factors, we find that a 10% increase in the number of patents relevant to market reduces the rate of entry by 3%-8%, and this relationship intensified following expansions in the patentability of software in the mid-1990s. However, potential entrants with patent applications relevant to a market are more likely to enter it. Finally, patents appear to substitute for complementary assets in the entry process, because patents have both greater entry-deterring and entry-promoting effects for firms without prior experience in other markets. This paper was accepted by Bruno Cassiman, business strategy.

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File URL: http://dx.doi.org/10.1287/mnsc.1110.1321
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 5 (May)
Pages: 915-933

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:5:p:915-933
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  1. Prusa, Thomas J. & Schmitz, James Jr., 1991. "Are new firms an important source of innovation? : Evidence from the PC software industry," Economics Letters, Elsevier, vol. 35(3), pages 339-342, March.
  2. Josh Lerner, 2002. "150 Years of Patent Protection," American Economic Review, American Economic Association, vol. 92(2), pages 221-225, May.
  3. Bronwyn H. Hall, 2005. "Exploring the Patent Explosion," The Journal of Technology Transfer, Springer, vol. 30(2_2), pages 35-48, 01.
  4. Carl Shapiro, 2001. "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting," NBER Chapters, in: Innovation Policy and the Economy, Volume 1, pages 119-150 National Bureau of Economic Research, Inc.
  5. Bronwyn H. Hall & Megan MacGarvie, 2006. "The Private Value of Software Patents," NBER Working Papers 12195, National Bureau of Economic Research, Inc.
  6. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers 151, Stanford - Studies in Industry Economics.
  7. Wooldridge, Jeffrey M., 1999. "Distribution-free estimation of some nonlinear panel data models," Journal of Econometrics, Elsevier, vol. 90(1), pages 77-97, May.
  8. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  9. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November.
  10. Adam B. Jaffe & Josh Lerner & Scott Stern, 2001. "Innovation Policy and the Economy, Volume 1," NBER Books, National Bureau of Economic Research, Inc, number jaff01-1, October.
  11. Prusa, Thomas J & Schmitz, James A, Jr, 1994. "Can Companies Maintain Their Initial Innovation Thrust? A Study of the PC Software Industry," The Review of Economics and Statistics, MIT Press, vol. 76(3), pages 523-40, August.
  12. Josh Lerner & Feng Zhu, 2005. "What is the Impact of Software Patent Shifts?: Evidence from Lotus v. Borland," NBER Working Papers 11168, National Bureau of Economic Research, Inc.
  13. James Bessen & Robert M. Hunt, 2004. "An empirical look at software patents," Working Papers 03-17, Federal Reserve Bank of Philadelphia.
  14. Sault, Joanne & Toivanen, Otto & Waterson, Michael, 2003. "Market Structure And Entry In Fast Food," The Warwick Economics Research Paper Series (TWERPS) 661, University of Warwick, Department of Economics.
  15. Lanjouw, Jean O. & Cockburn, Iain M., 2001. "New Pills for Poor People? Empirical Evidence after GATT," World Development, Elsevier, vol. 29(2), pages 265-289, February.
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