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Entry and Patenting in the Software Industry

  • Iain M. Cockburn
  • Megan J. MacGarvie

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, as patents have both greater entry-deterring and entry-promoting effects for firms without prior experience in other markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12563.

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Date of creation: Oct 2006
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Publication status: published as Cockburn, I., and MacGarvie, M. “Entry and Patenting in the Software Industry.” Management Science, May 2011. vol. 57 no. 5.
Handle: RePEc:nbr:nberwo:12563
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  1. Bronwyn H. Hall & Megan MacGarvie, 2006. "The Private Value of Software Patents," NBER Working Papers 12195, National Bureau of Economic Research, Inc.
  2. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers 151, Stanford - Studies in Industry Economics.
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  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. 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, August.
  9. Bronwyn H. Hall, 2005. "Exploring the Patent Explosion," The Journal of Technology Transfer, Springer, vol. 30(2_2), pages 35-48, 01.
  10. 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.
  11. 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.
  12. 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.
  13. James Bessen & Robert M Hunt, 2004. "An Empirical Look at Software Patents," Levine's Working Paper Archive 122247000000000167, David K. Levine.
  14. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  15. 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.
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