DP8281 | Creative Destruction and Productive Preemption

Publication Date

07/03/2011

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Abstract

We develop a theory of innovation for entry and sale into oligopoly, and show that an invention of higher quality is more likely to be sold (or licensed) to an incumbent due to strategic product market effects on the sales price. Preemptive acquisitions by incumbents are shown to stimulate the process of creative destruction by increasing the entrepreneurial effort allocated to high-quality invention projects. Using data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under bidding competition. Asymmetric information problems are shown to be solved by verification through entry for sale.