Acquisitions, entry, and innovation in oligopolistic network industries

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 option of selling to an incumbent increases the innovation incentives for entrepreneurs when the network effects are strong and incumbents compete to preemptively acquire 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.

The impact of compatibility on innovation in markets with network effects

“…The model combines elements of competition models with network effects to include compatibility (Malueg and Schwartz, 2006), installed-base customers (Cremer et al, 2000) and commercialization of innovations by either entry or acquisition (Norbäck and Persson, 2012;Norbäck et al, 2014), deriving results that depend on the compatibility condition (Economides, 1996). The model identifies how incentives for innovation are impacted by the strategic compatibility responses of incumbents according to the strength of network effects and the ambition of innovation effort.…”

“…Demand is adapted from Economides (1996) and Norbäck et al (2014) such that consumers have a preference for quality (A i ), the industry has constant strength of network effects (0 < α < 1) and firms offer either full-compatibility or incompatibility (β i = 1 or β i = 0 respectively) with all rivals' varieties. Networks are considered compatible when both firms' offers agree to offer compatibility (i.e.…”

“…Therefore, it is not clear in existing models how network effects influence the incentive for innovation or the extent of improvements targeted by entrepreneurs when the compatibility regime is dynamic. This article extends and combines elements of these standard models of network effects (Katz and Shapiro, 1985;Economides, 1996;Norbäck and Persson, 2012;Norbäck et al, 2014) to understand the interaction between compatibility choices and innovation. The model finds that the threat of incompatibility disincentivises incremantal innovations if the strength of network effects is not sufficiently strong, implying that entrepreneurs will sacrifice a higher probability of successfully innovating in order to retain a favourable compatibility regime if the innovation is achieved.…”

Study on the R&D Pattern of Shipping Industry Cluster Network From the perspective of Coopetition-relationships between Enterprises

“…In addition, in the shipping industry cluster network,it's a fact that many core enterprises (shipyard) which are facing the same market competing for more orders, and then the cluster network has the features multi alliance structure and there are competition relationships between SESs which is seeking the partnership with shipyard just because of this fact [8][9][10]. Norback(2014). Believes that the benign competition can stimulate the network member enterprises to carry out independent research and development, while the price war based vicious competition is not conducive to the development of the network [11].…”

“…Norback(2014). Believes that the benign competition can stimulate the network member enterprises to carry out independent research and development, while the price war based vicious competition is not conducive to the development of the network [11]. In summary, there is a relationship between different levels of cooperation and competition within the shipping industry cluster network, which has an important influence on the development of the network.…”