When should a winner take all, or pay some? Innovation and imitation incentives in a dynamic duopoly

Billette de Villemeur, Etienne and Ruble, Richard and Versaevel, Bruno (2016): When should a winner take all, or pay some? Innovation and imitation incentives in a dynamic duopoly.

Abstract

We develop a model of investment in duopoly with asymmetric costs of innovating and imitating and endogenous firm roles. Dynamic competition involves either attrition or preemption, the former being likelier with high demand growth and uncertainty. Industry value is maximized when firms neither stall nor hasten entry, and we show that social welfare has local maxima in both the attrition and preemption ranges. In all cases the socially optimal cost of imitation is positive. Attrition is optimal if consumer surplus rises sufficiently under duopoly, whereas with static business-stealing, preemption is optimal if discounting is important enough. Finally we discuss endogenous entry barriers and contracting, finding that firms are more likely to rely on secrecy and patents at low imitation costs and that simple licensing schemes are welfare improving.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dynamic oligopoly; Knowledge spillover; Real options
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O33 - Technological Change: Choices and Consequences ; Diffusion Processes

References

Azevedo A, Paxson D (2014) Developing real option game models, European Journal of Operational Research 237(3):909-920.

Billette de Villemeur E, Ruble R, Versaevel B (2014) Investment timing and vertical relationships, International Journal of Industrial Organization 33:110-123.

Boldrin M, Levine D (2013) The case against patents, Journal of Economic Perspectives 27(1):3-22.

Boyer M, Lasserre P, Moreaux M (2012) A dynamic duopoly investment game without commitment under uncertain market expansion, International Journal of Industrial Organization 30(6):663-681.

Chevalier-Roignant B, Trigeorgis L (2011) Competitive Strategy: Options and Games, (Cambridge: MIT Press).

Cohen W. M., Nelson, R.R., Walsh J. P. (2000) Protecting their intellectual assets: appropriability conditions and why U.S. manufacturing firms patent (or not), NBER Working Paper No. 7552.

Décamps J-P, Mariotti T (2004) Investment timing and learning externalities, Journal of Economic Theory 118:80-102.

Denicolò V (1996) Patent races and optimal patent breadth and length, Journal of Industrial Economics 44(3):249-265.

Denicolò V (2000) Two-stage patent races and patent policy, RAND Journal of Economics 31(3):488-501.

Dixit A, Pindyck R (1994) Investment under Uncertainty, (Princeton: Princeton University Press).

Femminis G, Martini G (2011) Irreversible investment and R&D spillovers in a dynamic duopoly, Journal of Economic Dynamics and Control 35(7):1061-1090.

Fudenberg D, Tirole J (1985) Preemption and rent equalization in the adoption of new technology, Review of Economic Studies 52(3):383-401.

Fudenberg D, Tirole J (1987) Understanding rent dissipation: On the use of game theory in industrial organization, American Economic Review 77(2):176-183.

Gallini N (1992) Patent policy and costly imitation, RAND Journal of Economics 23(1):52-63.

Gilbert R, Shapiro C (1990) Optimal patent length and breadth, RAND Journal of Economics 21(1):106-112.

Grabowski HG, DiMasi JA, Long G, (2015) The roles of patents and research and development incentives in biopharmaceutical innovation, Health Affairs 34(2):302-310.

Green J, Scotchmer S (1995) On the division of product in sequential innovation, RAND Journal of Economics 26(1):20-33.

Guey Chuen P, Huan-Yao L, Yee-Shin L, Kulkanya C (2011) Dengue vaccines: challenge and confrontation, World Journal of Vaccines 1:109-130.

Hendricks K, Weiss A, Wilson C (1988) The war of attrition in continuous time with complete information, International Economic Review 29(4):663-680.

Henry E, Ruiz-Aliseda, F (2015) Keeping secrets: the economics of access deterrence, mimeo.

Hoppe H. (2000) Second-mover advantages in the strategic adoption of new technology under uncertainty, International Journal of Industrial Organization 18:315-338.

Huisman K (2001) Technology Investment: A Game Theoretic Real Options Approach (Boston: Kluwer Academic Publishers).

Katz M, Shapiro C (1987) R and D rivalry with licensing or imitation, American Economic Review 77(3):402-420.

Lanjouw J (1998) The introduction of pharmaceutical product patents in India: 'Heartless exploitation of the poor and suffering' ?, NBER Working Paper No.6366.

Mankiw G, Whinston M (1986) Free entry and social inefficiency, RAND Journal of Economics 17(1):48-58.

Mansfield E (1985) How rapidly does new industrial technology leakout?, Journal of Industrial Economics 34(2):217-223.

Mansfield E, Schwartz M, Wagner S (1981) Imitation costs and patents: An empirical study, The Economic Journal 91(364):907-918.

Mukherjee A, Pennings E (2004) Imitation, patent protection, and welfare, Oxford Economic Papers 56(4):715-733.

Reinganum J (1981) On the di�usion of a new technology: a game theoretic approach, Review of Economic Studies 48(3):395-405.

Samuelson P, Scotchmer S (2002) The law and economics of reverse engineering, Yale Law Journal 111:1575-1663.

Scherer F, Watal J (2002) Post-TRIPS options for access to patented medicines in developing countries, Journal of International Economic Law 5(4):913-939.

Steg J-H (2015) Symmetric equilibria in stochastic timing games, working paper 543, Center for Mathematical Economics, University of Bielefeld.

Thijssen J (2013) Game theoretic real options and competition risk, in: Bensoussan A, Peng S, Sung J (eds.), Real Options, Ambiguity, Risk and Insurance (Amsterdam: IOS Press).

Thijssen J, Huisman K, Kort P (2006) The effects of information on strategic investment and welfare, Economic Theory 28(2):399-424.

Thijssen J, Huisman K, Kort P (2012) Symmetric equilibrium strategies in game theoretic real option models, Journal of Mathematical Economics 48(4):219-225.

Wilson P (2010) Giving developing countries the best shot: An overview of vaccine access and R&D, Oxfam International, 28 pages.

Weeds H (2002) Strategic delay in a real options model of R&D competition, Review of Economic Studies 69(3):729-747.

World Health Organization (2011) Increasing access to vaccines through technology transfer and local production, 34 pp. (http://www.who.int/phi/publications/local_production_vaccines/en/, last accessed 15/7/ 2015).