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Product innovation and market acquisition of firms

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  • GABSZEWICZ, Jean

    () (Professor Emeritus, Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

  • TAROLA, Ornella

    () (University of Rome "La Sapienza", Italy)

Abstract

The paper explores the incentives for an incumbent firm to acquire an entrant willing to sell a product innovation, rather than openly compete with this entrant and, in case of acquisition, the incentives to sell simultaneously both the existing products and the new one, rather than specializing on a single variant. We prove that, in some circumstances, an incumbent firm can find it profitable to make an acquisition proposal to the entrant in order to deter entry. Nevertheless, in this acquisition scenario, a product proliferation strategy is never observed at equilibrium. Rather, the incumbent restricts itself to offer either its own variant or the product innovation produced by the entrant, depending on the quality differential existing between them. It follows that, while being available for sale, sometimes the innovation simply remains unexploited

Suggested Citation

  • GABSZEWICZ, Jean & TAROLA, Ornella, 2010. "Product innovation and market acquisition of firms," CORE Discussion Papers 2010078, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2010078
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    File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2010_78web.pdf
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    References listed on IDEAS

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    8. Gallini, Nancy T, 1984. "Deterrence by Market Sharing: A Strategic Incentive for Licensing," American Economic Review, American Economic Association, vol. 74(5), pages 931-941, December.
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