funda9 Flashcards
What happens to profits when the incumbent innovates versus when the entrant innovates?
If the incumbent innovates: It retains its monopoly, earning profits πm(c₁), while the entrant earns 0 as it cannot enter.
If the entrant innovates: The entrant enters, earning profits πd(c₁, c₀), while the incumbent competes at a higher cost, earning πd(c₀, c₁).
What are the innovation incentives for the incumbent and the entrant?
Incumbent’s incentive (VI): The difference between its monopoly profit after innovating (πm(c₁)) and its profit under competition (πd(c₀, c₁)).
Entrant’s incentive (VE): Its profit from entering with the innovation, which equals πd(c₁, c₀).
When does the incumbent have higher incentives to innovate?
Its monopoly profit (πm(c₁)) exceeds the combined profits of the entrant and incumbent under competition (πd(c₁, c₀) + πd(c₀, c₁)).
This condition is likely when the firms’ products are close substitutes, leading to intense competition if the entrant succeeds.
What is the joint profit effect, and how does it influence the incumbent’s innovation strategy?
The joint profit effect refers to the fear of losing its monopoly, motivating the incumbent to innovate. By innovating, the incumbent avoids competition, prolongs its monopoly, and prevents profit erosion caused by the entrant’s market entry.
Why is correlation not causation, and what are the two main challenges?
Reason 1: Omitted Variables
Factors like market size, technological opportunity, and appropriability conditions can influence both competition and innovation.
Solution: Include control variables in the analysis, but some factors may still be unobservable.
Reason 2: Endogeneity of Market Structure
Market power and competition are shaped by firms’ past R&D investments and fixed costs.
Example: In industries like pharmaceuticals, high innovation costs create entry barriers, reducing competition.
How do researchers address the challenge of proving causation in competition and innovation studies?
They exploit exogenous changes in competition, such as:
Removal of trade barriers.
Regulatory changes (e.g., privatization).
Antitrust authority decisions (e.g., dissolving cartels).
Example: Kang (2023) used cartel dissolution cases in the US (1975–2016) to study innovation:
During collusion (low competition), patent filings rose by 28%, top-quality patents by 20%, and R&D investment by 16%.
After collusion ended (higher competition), innovation returned to pre-collusion levels.
What factors contribute to Big Tech’s dominance in digital industries?
Complementary assets: Resources like customer data, distribution channels, and R&D capabilities.
Network effects: The value of the platform increases with more users (e.g., social media, e-commerce).
Startups often lead in technology innovation but lack resources to scale.
How do Big Tech acquisitions impact innovation?
Positive effects (“Innovation Zone”):
Encourages startup entry and venture capital investments.
Startups integrate innovations into Big Tech, scaling them to commercial levels.
Example: Post-acquisition, VC deals in the industry increase by 20% (Prado & Bauer, 2022).
Negative effects (“Killer Acquisitions”):
Acquisitions may aim to shut down disruptive innovations to reduce competition (5-7% in pharma).
Startups may avoid aggressive innovation, fearing retaliation or limited negotiating power.
What are the key effects influencing Big Tech’s impact on innovation?
Schumpeterian Effect:
Large firms dominate due to resources and economies of scale, benefiting most from innovation.
These firms may innovate to maintain leadership.
Escape Competition Effect:
Firms innovate to differentiate and gain market power, especially in competitive industries.
Big Tech may innovate less disruptively in markets they already dominate.
Joint Profit Effect:
Dominant firms innovate to prolong monopoly and deter new entrants.
Example: Fear of competition drives incumbents to bid more aggressively for innovation rights.
Overall: These effects combine in complex ways, making the relationship between competition and innovation potentially non-linear (e.g., inverted U-shape).
