Preemptive acquisition and downgrading innovation.

Abstract

Research papers on innovation activity share the view that whenever an invention is made available by a startup innovator, getting its ownership by acquisition is beneficial for incumbent firms. In this note, I show by means of an example that there are some circumstances in which accomodating entry and competing with the innovator in the product market can be substantially more profitable than blocking her entry via acquisition.INNOVATION, VERTICAL DIFFERENTIATION, NATURAL DUOPOLY