Product Innovation And Market Acquisition Of Firms
The paper explores the incentives for an incumbent firm to acquire an entrant willing to sell a product innovation, rather than openly compete with this entrant and, in case of acquisition, the incentives to sell simultaneously the existing products and the new one, rather than specializing on a single variant. The authors prove that, in some circumstances, an incumbent firm can find it profitable to make an acquisition proposal to the entrant in order to deter entry. Nevertheless, in this acquisition scenario, a product proliferation strategy is never observed at equilibrium. Rather, the incumbent restricts itself to offer either its own variant or the product innovation produced by the entrant, depending on the quality differential existing between them.