Entrepreneurial Innovations , Competition and Competition Policy

We construct a model where an entrepreneur could innovate for entry or for sale. It is shown that increased product market competition tends to increase the relative profitability of innovation for sale. Increased competition reduces entrants’ and acquirers’ profits in a similar fashion, but also reduces the profit of non-acquirers. Therefore, incumbents’ valuations of innovations are less negatively affected by increased competition, and the incentive for innovation for sale can increase with increased competition. Moreover, a stricter, but not too strict, merger policy is shown to increase the incentive for innovations for sale by ensuring the bidding competition for the innovation. ∗We have benefitted from useful comments from Daron Acemoglu, Philippe Aghion, Catherine Casamatta, Mattias Ganslandt, Henrik Horn, Dan Kovenock, Kevin Murphy, Jonas Vlachos and participants in seminars at the CEPR/IUI Workshop on Innovation, Ownership and Competition in Stockholm, Universidade Católica Portuguesa, RICAF2 Second Conference in Riga, and Stockholm School of Economics. Financial support from the Marianne and Marcus Wallenberg Foundation and Tom Hedelius’ and Jan Wallander’s Research Foundation is gratefully acknowledged. This paper was written within the Gustaf Douglas Research Program on Entrepreneurship. Email: [email protected]