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Endogenous Network Formation in Patent Contests And Its Role as A Barrier to Entry

Authors


  • We are particularly grateful to the Editor of this journal, two anonymous referees and Paul Belleflamme for excellent comments and suggestions. This paper has also benefited from discussions with Rabah Amir, Achille Puggioni, Xavier Wauthy and seminar participants at CEREC, CORE, University of Namur, University of Valencia, PET2009 and EARIE 2010. The authors gratefully acknowledge financial support from the Belgian Inter-university Attraction Pole IAP/PAI P9/06 and Wouter Vergote is thankful for financial support from the FNRS. The responsibility for remaining errors is ours.

Abstract

In a setting of R&D competition, we study how collaboration affects strategic decisions during a patent contest, and how the latter influences the collaboration network structures the firms can form. We use an all pay auction approach to endogenize both network formation and R&D intensities, and to take heterogeneous and private valuations for patents into account. We find that the complete network is not always the only pairwise stable one. The other stable networks have the realistic property that some firms drop out of the contest. Thus, ‘weak’ cooperation can serve as a barrier to entry on the market for innovation.

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