Innovation, competition, and incomplete adoption of a superior technology

This article shows that competition exerts a feedback effect on market structure via the process of innovation. First, downstream competition increases the willingness to pay for a more efficient technology (the direct effect). Second, a sufficiently large innovation may offer the licensees a robust strategic advantage that forces non-adopters out of business. In turn, this raises the licensee's willingness to pay to survive in the market (the indirect effect). More specifically, if competition is intense, even a tiny innovation may result in drastic effects in the market. This work also demonstrates that royalties do not always imply the complete adoption of a superior technology because of competition's indirect effect on innovation. If granted the possibility of denying access to innovation to some downstream manufacturers, an inventor or rights holder may prefer to license a substantial patent to a subset of manufacturers at a discounted price, regardless of the contract scheme enforced. Finally, this article suggests that a ban on obsolete technology is not welfare-improving from a policy perspective.

Sandrini, Luca (2022), Innovation, competition, and incomplete adoption of a superior technology, Economics of Innovation and New Technology 32(6) , 783-803