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Negotiating for the Market

Joshua Gans University of Melbourne March, 2010

Thursday, 11 March 2010

Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

Markets for Ideas
•Traditional models of innovation: competition
Start-ups innovate for entry into product markets and displace incumbents (Gilbert & Newbery, 1981; Reinganum, 1983)

•New Models of innovation: competition
Start-Ups have options to engage in cooperative commercialisation (e.g., licensing, acquisitions) rather than compete in product markets (Salant, 1982; Gans and Stern, 2000) Advantages in saving on duplicative complementary assets (Teece, 1986) or softening of product market competition

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Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

Sources of Entrepreneurial Rents
Cooperation with established firms Competition with established firms

Source: Thomson Venture/NVCA

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Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

Sources of Entrepreneurial Rents

Source: Disk Drives, Christensen (1997, p.23)

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Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

New Model: Cooperation (Biotech)

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Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

Creation without Destruction?
•Competition: Technological entrepreneurship can displace
product market incumbents - Entrepeneurship implies creative destruction

•Cooperation: Technological entrepreneurship may reinforce
existing market power - Entrepreneurship leads to creation but no destruction

Key insight: Competition vs cooperation is not a given but a choice ... the result of negotiations between start-ups and incumbents.
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Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

Research Agenda
•Builds on research program with Scott Stern (MIT) and David
Hsu (Wharton) ...

•To use insights from bargaining theory to understand the
commercialisation choices entrepreneurial start-ups.

•Questions:
What are the gains from trade between start-ups and established firms? What impediments exist that might prevent these gains from being realised? What are the welfare consequences of these choices?
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Negotiating for the Market
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Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

This Paper
•Consider a dynamic environment. •Understand whether licensing and acquisitions are likely to
occur in a Schumpeterian environment -- that is, competition for the market is more important than competition in the market. on the rate of innovation in the industry.

•Characterise the welfare impact of cooperation -- specifically

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Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

(Bilateral) Gains from Trade
•A start-up firm and an incumbent will trade in ideas markets if
their joint surplus exceeds their outside options - Outside options: If the start-up can enter the product market (or deal

-

with another incumbent), then these are their profits under competition plus sunk entry costs (Teece, 1986) Joint surplus: Continuation of incumbent position (plus additional value of innovation) Implies gains from trade: avoiding duplicative investments and softening product market competition (Gilbert & Newbery)

•Long-run: incumbent need not invest as much in R&D capabilities
Caveat: ability to generate substitute innovations to dampen start-up bargaining power (Gans & Stern, 2000)
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Negotiating for the Market
Thursday, 11 March 2010

Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

Impediments to Ideas Trading
•Bargaining inefficiency
- Information asymmetries cause inefficient break-downs or delay -- however,
we will see attempted trading.

•No gains from trade
- There are incomplete contracts implying that continued start-up ownership
and control is important. For example, to facilitate the transfer of tacit knowledge (Arora, 1995).

•Strategic bypass
- Negotiations may require disclosures that harm the start-up’s competitive
position (i.e., allowing incumbent imitation); so much so that they avoid the negotiation option -- Arrow’s disclosure problem (Anton & Yao, 1994).
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Thursday, 11 March 2010

Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

Dynamics and Ideas Markets
•Static rationale for cooperative commercialisation is strong •Informal strategic concern (esp in teaching cases)
EMI & the CT Scanner: “licensing would be ... ‘selling our birthright.’ ” Nucleon: licensing was viewed as ‘mortgaging away’ the company’s future. Ecton: “Cannon was also concerned about the impact that an acquisition might have on Ecton’s product

development process…. The Ecton founders were worried that if their company were absorbed into a larger organization after acquisition, their development efforts for next-generation products would get mired … Perhaps, they reasoned, their efforts would be more successful in the long run if they remained independent until they had a refined product development process that might survive acquisition and integration.”

•Informal economic reaction:
No problem. Then start-up should build future losses into the ‘price.’

•Formal evaluation
Requires a dynamic model of successive innovation
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Thursday, 11 March 2010

Introduction Competition Cooperation Conclusion

Markets for Ideas Research Question Literature Outline

Outline

•Set-up dynamic model based on Segal-Whinston (2008) •Equilibrium under competition •Equilibrium under licensing •Equilibrium under acquisition

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Technological Dynamics
•Most models of innovation and ideas markets are static
Roles of firms in an industry is fixed Single innovation race

•Dynamics -- on-going innovation races
Entrants come in and may become incumbents Incumbents protect against entrants Licensing may preserve roles in equilibrium but not off the equilibrium path

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Segal-Whinston (AER, 2008)
•Model of dynamic technological competition
SW apply to antitrust practices SW consider entrants as competing and displacing incumbents -- ongoing change

•Here, modifications
Remove static competition effects to focus on dynamics in Schumpeterian, ‘winner-take-all’ or ‘for the market’ competition. Incorporate ideas markets Model dynamic capabilities (firms may not be long-lived)

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Firms & Innovations
• Discrete time, infinite horizon with common discount factor, δ • Innovations are sequential
Innovation yields new product of higher quality than previous generation

• Incumbent (I)
There is a single producer of the new product who can earn per period monopoly rents, Π, until displaced.

• Innovation leader
For each product generation only one firm conducts R&D Innovation leader drawn from pool of firms including the current incumbent (O’Donoghue, Scotchmer and Thisse, 1998) I can be the innovation leader and prolong incumbency Otherwise, label leader as ‘entrant’ or E.
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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Innovation Rate

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Innovation Rate

Innovation Leader chosen

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Innovation Rate
E Innovation Leader chosen

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Innovation Rate
Choose E Innovation Leader chosen
φ E ∈[φ ,1]

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Innovation Rate
Choose E Innovation Leader chosen I
φ E ∈[φ ,1]

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Innovation Rate
Choose E Innovation Leader chosen I Choose
φ I ∈[φ ,1]

φ E ∈[φ ,1]

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Innovation Rate
Choose E Innovation Leader chosen I Choose
φ I ∈[φ ,1]

φ E ∈[φ ,1]

No cost to R&D
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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Innovation Rate
Choose E Innovation Leader chosen I Choose
φ I ∈[φ ,1]

φ E ∈[φ ,1]

ˆ φE = 1

No cost to R&D
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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Innovation Rate
Choose E Innovation Leader chosen I Choose
φ I ∈[φ ,1]
ˆ φI = φ

φ E ∈[φ ,1]

ˆ φE = 1

No cost to R&D
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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Commercialisation Choices

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Commercialisation Choices

Entrant Innovates

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Commercialisation Choices

Competition

Entrant Innovates

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Commercialisation Choices
I loses monopoly profits

Competition

Entrant Innovates

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Commercialisation Choices
I loses monopoly profits E becomes I (earns Π)

Competition

Entrant Innovates

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Commercialisation Choices
I loses monopoly profits E becomes I (earns Π)

Competition

Entrant Innovates

Cooperation

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Commercialisation Choices
I loses monopoly profits E becomes I (earns Π)

Competition

Entrant Innovates I retains monopoly profits

Cooperation

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Commercialisation Choices
I loses monopoly profits E becomes I (earns Π)

Competition

Entrant Innovates I retains monopoly profits E remains E (earns τ)

Cooperation

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only Production & Innovation
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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only Production & Innovation
Negotiating for the Market
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Example

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only Production & Innovation
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Example
I not an innovation leader

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only Production & Innovation
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Example
I not an innovation leader E as innovation leader

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only Production & Innovation
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Example
I not an innovation leader E as innovation leader Merger or I as innovation leader
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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only Production & Innovation
Negotiating for the Market
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Example
I not an innovation leader E as innovation leader Merger or I as innovation leader

Probability of becoming Leader

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only Production & Innovation
Negotiating for the Market
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Example
I not an innovation leader E as innovation leader Merger or I as innovation leader

Probability of becoming Leader

σ p ∈[0,1]

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only Production & Innovation
Negotiating for the Market
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Example
I not an innovation leader E as innovation leader Merger or I as innovation leader

Probability of becoming Leader

σ p ∈[0,1]

σ i ∈[0,1]

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Dynamic Capabilities
Prior Activity Production Only Innovation Only Production & Innovation
Negotiating for the Market
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Example
I not an innovation leader E as innovation leader Merger or I as innovation leader

Probability of becoming Leader

σ p ∈[0,1]

σ i ∈[0,1]
σ ip ≥ max{σ p , σ i }
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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader I

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader I Capabilities Stage
I acquires innovation and production capabilities

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader I Capabilities Stage
I acquires innovation and production capabilities

Research Stage
I earns Π and chooses ϕI in each period until innovates

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader I Capabilities Stage
I acquires innovation and production capabilities

Research Stage
I earns Π and chooses ϕI in each period until innovates

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader I or E Capabilities Stage
I acquires innovation and production capabilities

Research Stage
I earns Π and chooses ϕI in each period until innovates

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader I or E
E acquires innovation capability and I acquires production capability

Capabilities Stage
I acquires innovation and production capabilities

Research Stage
I earns Π and chooses ϕI in each period until innovates

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader I or E
E acquires innovation capability and I acquires production capability I earns Π and E chooses ϕE in each period until innovates

Capabilities Stage
I acquires innovation and production capabilities

Research Stage
I earns Π and chooses ϕI in each period until innovates

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader I or E
E acquires innovation capability and I acquires production capability I earns Π and E chooses ϕE in each period until innovates

Capabilities Stage
I acquires innovation and production capabilities

Research Stage
I earns Π and chooses ϕI in each period until innovates

Competition Stage

E replaces I

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Competition
Innovation Leader I or E
E acquires innovation capability and I acquires production capability I earns Π and E chooses ϕE in each period until innovates

Capabilities Stage
I acquires innovation and production capabilities

Research Stage
I earns Π and chooses ϕI in each period until innovates

Competition Stage

E replaces I

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Continuation Payoffs

VE = (1 − φ E )δVE + φ E (Π + σ iδV + (1 − σ i )δVI )
i I

VI = (1 − φ E )(Π + δVI ) + φ Eσ pδVE
V = (1 − φ I )(Π + δV ) + φ I (Π + σ ipδV + (1 − σ ip )δVI )
i I i I i I

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Model Set-Up Equilibrium Restructuring

Incentives to Innovate

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Incentives to Innovate

E

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Incentives to Innovate

E

Π + σ iδV + (1 − σ i )δVI − δVE
i I

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Incentives to Innovate

E

Π + σ iδV + (1 − σ i )δVI − δVE
i I

I

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Incentives to Innovate

E

Π + σ iδV + (1 − σ i )δVI − δVE
i I

I

(1 − σ ip )δ (V − VI )
i I

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Incentives to Innovate

E

Π + σ iδV + (1 − σ i )δVI − δVE
i I

ˆ φE = 1

I

(1 − σ ip )δ (V − VI )
i I

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Incentives to Innovate

E

Π + σ iδV + (1 − σ i )δVI − δVE
i I

ˆ φE = 1

I

(1 − σ ip )δ (V − VI )
i I

ˆ φI = φ

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Markov perfect equilibrium
VE = VI =
i I
1 Δc 1 Δc

Π 1 − δ (1 − φ ) + δ (σ i − φσ ip )

δΠ 1 − δ (1 − φ ) + δ (σ i − φσ ip ) σ p
1 Δc

(

(

V =

Π 1 − δ 1 − φ (1 − σ ip
2

(

(

) ) − σ )σ )
i p

)

Δ c = 1 − δ (1 − φ ) − δ (φσ ip + δ ((1 − δ (1 − σ i ) + δφ (1 − σ ip ))σ p )

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Introduction Competition Cooperation Conclusion

Model Set-Up Equilibrium Restructuring

Restructuring & Spin-Outs
Would an incumbent innovation leader spin-out its innovating arm?

•Not worthwhile if ...
V ≥ VI + VE ⇒ 1 − φ (1 − σ ip ) ≥ σ i + σ p
i I

... but spin-outs are always socially desirable as entrants innovate more than incumbents

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Licensing
Innovation Leader I or E
E acquires innovation capability and I acquires production capability I earns Π and E chooses ϕE in each period until innovates

Capabilities Stage
I acquires innovation and production capabilities

Research Stage
I earns Π and chooses ϕI in each period until innovates

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Licensing
Innovation Leader I or E
E acquires innovation capability and I acquires production capability I earns Π and E chooses ϕE in each period until innovates

Capabilities Stage
I acquires innovation and production capabilities

Research Stage
I earns Π and chooses ϕI in each period until innovates

Negotiation Stage

E negotiates with I

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Negotiations
Π − τ + σ pδV + (1 − σ p )δVI + τ + σ iδVE    
i I Joint Payoff from Cooperation i I

≥ σ pδVE + Π + σ iδV + (1 − σ i )δVI    
Joint Payoff from Competition

⇒ (σ p − σ i )δ V − VE − VI ≥ 0
i I

(

)

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Continuation Payoffs

VE = (1 − φ E )δVE + φ E (τ + σ iδVE )
VI = Π + (1 − φ E )δVI + φ E (−τ + σ pδV )
i I

V = (1 − φ I )(Π + δV ) + φ I (Π + σ ipδV + (1 − σ ip )δVI )
i I i I i I

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Markov Perfect Equilibrium
max τ Π − τ + σ pδV + (1 − σ p )δVI − σ pδVE
i I

(

) (τ + σ δV
1− γ i

E

− (Π + σ iδV + (1 − σ i )δVI )
i I

)

γ

ˆ φE = 1

ˆ φI = φ

Licensing is the unique equilibrium outcome if ...

(σ p − σ i )δ 1 − φ (1 − σ ip ) − σ i − σ p ≥ 0

(

)

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Licensing Equilibrium Outcomes
σ ip

Competition
σp

VIi < VI + VE

Licensing

Licensing

Competition
σi
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VIi ≥ VI + VE

σ ip
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Licensing Restructuring Acquisition

Licensing Equilibrium Outcomes
σ ip

Competition
σp

VIi < VI + VE

Licensing

Licensing

Does high σi drive competition?
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Competition
σi

VIi ≥ VI + VE

σ ip
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Licensing Restructuring Acquisition

Intuition
If VIi ≥ VI + VE want an incumbent innovator
σ p > σ i achieve that by keeping I as incumbent (Licensing) σ p < σ i achieve that by making E the incumbent (Competition)

VIi < VI + VE want an entrant innovator If
σ p > σ i achieve that by making E the incumbent (Competition) σ p < σi

achieve that by keeping I as incumbent (Licensing)

But welfare maximised by always maximising chance for entrant innovator
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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Restructuring
σ ip

Restructuring no gains from trade
σp

VIi < VI + VE

Licensing

Competition
σi
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VIi ≥ VI + VE

σ ip
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Licensing Restructuring Acquisition

Negotiations
Π − τ + σ ipδV + (1 − σ ip )δVI + τ   
i I Joint Payoff from Cooperation i I

≥ σ pδVE + Π + σ iδV + (1 − σ i )δVI    
Joint Payoff from Competition

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Negotiations
Π − τ + σ ipδV + (1 − σ ip )δVI + τ   
i I Joint Payoff from Cooperation i I

≥ σ pδVE + Π + σ iδV + (1 − σ i )δVI    
Joint Payoff from Competition

⇒ (σ ip − σ i )δ (V − VI ) ≥ σ pδVE
i I

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Negotiations
Π − τ + σ ipδV + (1 − σ ip )δVI + τ   
i I Joint Payoff from Cooperation i I

≥ σ pδVE + Π + σ iδV + (1 − σ i )δVI    
Joint Payoff from Competition

⇒ (σ ip − σ i )δ (V − VI ) ≥ σ pδVE
i I

1 − σ ip > 1 − σ i − σ p
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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Negotiations
Π − τ + σ ipδV + (1 − σ ip )δVI + τ   
i I Joint Payoff from Cooperation i I

≥ σ pδVE + Π + σ iδV + (1 − σ i )δVI    
Joint Payoff from Competition

⇒ (σ ip − σ i )δ (V − VI ) ≥ σ pδVE
i I

1 − σ ip > 1 − σ i − σ p
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implies positive externality on potential entrants
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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Continuation Payoffs

VE = (1 − φ E )δVE + φ Eτ
VI = Π + (1 − φ E )δVI + φ E (−τ + σ ipδV )
i I

V = (1 − φ I )(Π + δV ) + φ I (Π + σ ipδV + (1 − σ ip )δVI )
i I i I i I

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Markov Perfect Equilibrium

Negotiating for the Market
Thursday, 11 March 2010

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Markov Perfect Equilibrium
ˆ φE = 1 ˆ φI = φ

Negotiating for the Market
Thursday, 11 March 2010

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Markov Perfect Equilibrium
ˆ φE = 1 ˆ φI = φ

Acquisition is the unique equilibrium outcome if and only if ...

σ ip − σ i − σ p 1 − δ (1 − φ )(1 − σ ip ) ≥ 0

(

)

Negotiating for the Market
Thursday, 11 March 2010

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Markov Perfect Equilibrium
ˆ φE = 1 ˆ φI = φ

Acquisition is the unique equilibrium outcome if and only if ...

σ ip − σ i − σ p 1 − δ (1 − φ )(1 − σ ip ) ≥ 0
Sufficient condition:
Negotiating for the Market
Thursday, 11 March 2010

(

)

33/38

Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Markov Perfect Equilibrium
ˆ φE = 1 ˆ φI = φ

Acquisition is the unique equilibrium outcome if and only if ...

σ ip − σ i − σ p 1 − δ (1 − φ )(1 − σ ip ) ≥ 0
Sufficient condition: σ ip ≥ σ i + σ p
Negotiating for the Market
Thursday, 11 March 2010

(

)

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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Acquisition Equilibrium Outcomes
σ ip
VIi < VI + VE

Competition
σp

Does high σi drive competition?
Negotiating for the Market
Thursday, 11 March 2010

Acquisition
VIi ≥ VI + VE

σi

σ ip
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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Welfare
•Acquisition never socially desirable •Significant: commentators suggest that Schumpeterian
competition implies loose merger policy

•Here: merger consolidates capabilities to become next lead

innovator in incumbent’s hands (removes entrant capabilities) -with reduced innovation incentives.

•Merger delays forces of creative destruction
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Introduction Competition Cooperation Conclusion

Licensing Restructuring Acquisition

Licensing & Acquisition
σ ip

Lic’g
σp

Competition
VIi < VI + VE

Licensing

Acquisition

Compn
VIi ≥ VI + VE

σi
Negotiating for the Market
Thursday, 11 March 2010

σ ip
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Introduction Competition Cooperation Conclusion

Extensions Future Directions

Extensions
•R&D Costs
Would change little but if rates of innovation the same, the incentive to use negotiations to increase likelihood of incumbent innovator is removed.

•Product market competition
Increases (static) drivers for licensing Licensing involves additional welfare costs

•Multiple innovators
Incumbent still has lower incentives to innovate so conclusion unchanged
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Thursday, 11 March 2010

Introduction Competition Cooperation Conclusion

Extensions Future Directions

Future Directions

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Introduction Competition Cooperation Conclusion

Extensions Future Directions

Future Directions

•Endogenise capability acquisition

Negotiating for the Market
Thursday, 11 March 2010

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Introduction Competition Cooperation Conclusion

Extensions Future Directions

Future Directions

•Endogenise capability acquisition •Impact of other anti-trust practices under licensing

Negotiating for the Market
Thursday, 11 March 2010

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Introduction Competition Cooperation Conclusion

Extensions Future Directions

Future Directions

•Endogenise capability acquisition •Impact of other anti-trust practices under licensing •Richer space of strategic variables

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Thursday, 11 March 2010

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