Creative Destruction and Productive Preemptive Acquisitions

We develop a model of entrepreneurial innovation for entry and sale into oligopoliessuitable for welfare analysis. We show that the expected consumer welfare can be higherunder commercialization by sale than under commercialization by entry despite increasedmarket power in the product market. The reason is that when the quality of the invention issufficiently high, preemptive bidding competition among incumbents drives the acquisitionprice above the entry value. Entrepreneurs who sell their inventions will then have a strongerincentive to develop high-quality inventions than entrepreneurs who aims at entering theproduct market. Incumbents are hurt by this creative destruction process ignited by theentrepreneurs and thus have an incentive to undertake research to block entrepreneurs’research activities. We show that incumbents’ own research effort can reduce, but noteliminate, the entrepreneurs’ incentives to innovate for entry or sale