Abstract
We present a potentially benign naked exclusion mechanism that can be applied to sequential innovation; a non-patentable original innovation by the incumbent supplier fosters derivative innovation by rivals. In the absence of an appropriate legal framework, the original innovator’s equilibrium exclusivity contracts block subsequent efficient entry even if there is (leader–follower) competition in the contracting phase. However, the legal framework may maximize social welfare by imposing a ban on upfront lump-sum payments in exclusivity contracts (by all suppliers) combined with an outright ban on exclusivity contracts by the derivative innovator. The former ban precludes the exclusion of socially beneficial derivative innovation by causing the incumbent supplier to resort to accommodation, rather than to pure exclusion, strategies. The latter ban complements the former by preventing inefficient or excessive derivative innovation.
| Original language | English |
|---|---|
| Pages (from-to) | 891-915 |
| Number of pages | 25 |
| Journal | Economic Theory |
| Volume | 65 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - 2018 Jun 1 |
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All Science Journal Classification (ASJC) codes
- Economics and Econometrics
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Sequential innovation, naked exclusion, and upfront lump-sum payments. / Choi, Jay Pil; Stefanadis, Christodoulos.
In: Economic Theory, Vol. 65, No. 4, 01.06.2018, p. 891-915.Research output: Contribution to journal › Article
TY - JOUR
T1 - Sequential innovation, naked exclusion, and upfront lump-sum payments
AU - Choi, Jay Pil
AU - Stefanadis, Christodoulos
PY - 2018/6/1
Y1 - 2018/6/1
N2 - We present a potentially benign naked exclusion mechanism that can be applied to sequential innovation; a non-patentable original innovation by the incumbent supplier fosters derivative innovation by rivals. In the absence of an appropriate legal framework, the original innovator’s equilibrium exclusivity contracts block subsequent efficient entry even if there is (leader–follower) competition in the contracting phase. However, the legal framework may maximize social welfare by imposing a ban on upfront lump-sum payments in exclusivity contracts (by all suppliers) combined with an outright ban on exclusivity contracts by the derivative innovator. The former ban precludes the exclusion of socially beneficial derivative innovation by causing the incumbent supplier to resort to accommodation, rather than to pure exclusion, strategies. The latter ban complements the former by preventing inefficient or excessive derivative innovation.
AB - We present a potentially benign naked exclusion mechanism that can be applied to sequential innovation; a non-patentable original innovation by the incumbent supplier fosters derivative innovation by rivals. In the absence of an appropriate legal framework, the original innovator’s equilibrium exclusivity contracts block subsequent efficient entry even if there is (leader–follower) competition in the contracting phase. However, the legal framework may maximize social welfare by imposing a ban on upfront lump-sum payments in exclusivity contracts (by all suppliers) combined with an outright ban on exclusivity contracts by the derivative innovator. The former ban precludes the exclusion of socially beneficial derivative innovation by causing the incumbent supplier to resort to accommodation, rather than to pure exclusion, strategies. The latter ban complements the former by preventing inefficient or excessive derivative innovation.
UR - http://www.scopus.com/inward/record.url?scp=85016122844&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85016122844&partnerID=8YFLogxK
U2 - 10.1007/s00199-017-1042-3
DO - 10.1007/s00199-017-1042-3
M3 - Article
AN - SCOPUS:85016122844
VL - 65
SP - 891
EP - 915
JO - Economic Theory
JF - Economic Theory
SN - 0938-2259
IS - 4
ER -