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Standing on the Shoulders of Dwarfs: Dominant Firms and Innovation Incentives


  • Cabral, Luis


We develop a dynamic innovation model with three important features: (a) asymmetry between large and small firms ("giants" and "dwarfs"); (b) technology transfer by acquisition; and (c) the distinction between radical innovation (compete for the market) and incremental innovation (compete within the market). We provide conditions such that (a) greater asymmetry between giant and dwarfs decreases incremental innovation but increases radical innovation; and (b) allowing for technology transfer increases incremental innovation but decreases radical innovation. These results have several policy implications, including: (a) with weak markets for technology, a soft antitrust policy toward dominant firms leads to an increase in radical innovation but a decrease in incremental innovation; (b) a merger policy that restricts the acquisition of fringe firms by dominant firms leads to lower incremental innovation rates and higher radical innovation rates; (c) the effect of IP protection on innovation is mixed: by increasing the prize from patenting, it increases incremental innovation; but, by improving the market for technology, it reduces the rate of radical innovation.

Suggested Citation

  • Cabral, Luis, 2018. "Standing on the Shoulders of Dwarfs: Dominant Firms and Innovation Incentives," CEPR Discussion Papers 13115, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13115

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    References listed on IDEAS

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    Cited by:

    1. Jin, Ginger Zhe & Leccese, Mario & Wagman, Liad, 2023. "How Do Top Acquirers Compare in Technology Mergers? New Evidence from an S&P Taxonomy," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    2. GAUTIER Axel, & LAMESCH Joe,, 2020. "Mergers in the digital economy," LIDAM Discussion Papers CORE 2020001, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Denicolò, Vincenzo & Polo, Michele, 2021. "Mergers and innovation sharing," Economics Letters, Elsevier, vol. 202(C).
    4. Cabral, Luís, 2021. "Merger policy in digital industries," Information Economics and Policy, Elsevier, vol. 54(C).
    5. Bräuer, Richard, 2023. "The aggregate effects of the decline of disruptive innovation," IWH Discussion Papers 22/2023, Halle Institute for Economic Research (IWH).
    6. Jean-Michel Benkert & Igor Letina & Shuo Liu, 2023. "Startup Acquisitions: Acquihires and Talent Hoarding," Papers 2308.10046,, revised Feb 2024.
    7. Sai Krishna Kamepalli & Raghuram G. Rajan & Luigi Zingales, 2020. "Kill Zone," Working Papers 2020-19, Becker Friedman Institute for Research In Economics.
      • Sai Krishna Kamepalli & Raghuram Rajan & Luigi Zingales, 2020. "Kill Zone," NBER Working Papers 27146, National Bureau of Economic Research, Inc.
      • Zingales, Luigi & Kamepalli, Sai Krishna & Rajan, Raghuram, 2020. "Kill Zone," CEPR Discussion Papers 14709, C.E.P.R. Discussion Papers.
      • Kamepalli, Sai Krishna & Rajan, Raghuram G. & Zingales, Luigi, 2020. "Kill Zone," Working Papers 294, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    8. Ekaterina Prytkova, 2021. "ICT's Wide Web: a System-Level Analysis of ICT's Industrial Diffusion with Algorithmic Links," Jena Economics Research Papers 2021-005, Friedrich-Schiller-University Jena.
    9. Christian Fons-Rosen & Pau Roldan-Blanco & Tom Schmitz, 2022. "The Effects of Startup Acquisitions on Innovation and Economic Growth," Working Papers 944, Queen Mary University of London, School of Economics and Finance.
    10. Christopher Teh & Dyuti Banerjee & Chengsi Wang, 2022. "Acquisition-induced kill zone," Monash Economics Working Papers 2022-24, Monash University, Department of Economics.
    11. Schmutzler, Armin & Letina, Igor & Seibel, Regina, 2020. "Start-up Acquisitions and Innovation Strategies," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224631, Verein für Socialpolitik / German Economic Association.
    12. Ernest Liu & Atif Mian & Amir Sufi, 2022. "Low Interest Rates, Market Power, and Productivity Growth," Econometrica, Econometric Society, vol. 90(1), pages 193-221, January.
    13. Robin Mamrak, 2023. "Antitrust and (Foreign) Innovation: Evidence from the Xerox Case," Rationality and Competition Discussion Paper Series 396, CRC TRR 190 Rationality and Competition.
    14. Mrázová, Monika & Neary, J. Peter, 2020. "IO for exports(s)," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    15. Calvano, Emilio & Polo, Michele, 2021. "Market power, competition and innovation in digital markets: A survey," Information Economics and Policy, Elsevier, vol. 54(C).
    16. Igor Letina & Armin Schmutzler & Regina Seibel, 2020. "Killer acquisitions and beyond: policy effects on innovation strategies," ECON - Working Papers 358, Department of Economics - University of Zurich, revised Jul 2023.
    17. Jean-Michel Benkert, Igor Letina, Shuo Liu, 2023. "Startup Acquisitions: Acquihires and Talent Hoarding," Diskussionsschriften dp2309, Universitaet Bern, Departement Volkswirtschaft.
    18. Gautier, Axel & Lamesch, Joe, 2021. "Mergers in the digital economy," Information Economics and Policy, Elsevier, vol. 54(C).
    19. Rabbani, Maysam, 2021. "Mergers with Future Rivals Can Boost Prices, Intensify Market Concentration, and Bar Entry," MPRA Paper 112864, University Library of Munich, Germany, revised 26 Apr 2022.
    20. Ekaterina Prytkova & Simone Vannuccini, 2022. "On the basis of brain: neural-network-inspired changes in general-purpose chips," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 31(4), pages 1031-1055.
    21. Steffen, Nico & Wiewiorra, Lukas & Kroon, Peter, 2021. "Wettbewerb und Regulierung in der Plattform- und Datenökonomie," WIK Discussion Papers 481, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    22. Kevin A. Bryan & Erik Hovenkamp, 2020. "Antitrust Limits on Startup Acquisitions," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(4), pages 615-636, June.
    23. Esmée Dijk & José Luis Moraga-González & Evgenia Motchenkova, 2023. "Start-up Acquisitions and the Entrant’s and Incumbent’s Innovation Portfolios," Tinbergen Institute Discussion Papers 23-047/VII, Tinbergen Institute.
    24. Laureen de Barsy & Axel Gautier, 2024. "Big Tech Acquisitions and Innovation: An Empirical Assessment," CESifo Working Paper Series 11025, CESifo.
    25. Steven Callander & Niko Matouschek, 2022. "The Novelty of Innovation: Competition, Disruption, and Antitrust Policy," Management Science, INFORMS, vol. 68(1), pages 37-51, January.

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