Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 867: Acquisitions, Entry and Innovation in Oligopolistic Network Industries

Pehr-Johan Norbäck (), Lars Persson () and Joacim Tåg ()
Additional contact information
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Joacim Tåg: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: In industries with network effects, incumbents’ installed bases create barriers to entry that discourage entrepreneurs from developing new innovations. Yet, entry is not the only commercialization route for entrepreneurs. We show that the op- tion of selling to an incumbent increases the innovation incentives for entrepreneurs when the network effects are strong and incumbents compete to preemptively ac- quire innovations. Thus, we establish that network effects and installed bases do not necessarily restrict the innovation incentives, and that network effects promote acquisitions over entry.

Keywords: Acquisitions; Entry; Network effects; Innovation; R&D

JEL-codes: L10; L15; L26; L50; L86; O31

37 pages, First version: April 6, 2011. Revised: November 30, 2016.

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