Standing on the Shoulders of Babies: Dominant Firms and Incentives to Innovate

摘要

Critics of Microsoft and Google's dominance claim these companies arenothing but "giants standing on the shoulders of babies,"whose dominance destroys the incentives for entrants to innovate. Bycontrast, pro-Microsoft and pro-Google analysts stress the benefits oflarge, innovative firms. We analyze the validity of these competingclaims in a model of R&D and product market competition between adominant firm and a small rival. An increase in firm dominance, which wemeasure by a premium in consumer valuation, increases the dominantfirm's incentives but decreases the rival firm's incentives for R&D.We provide sufficient conditions such that the positive effect on thedominant firm is mostly infra-marginal, whereas the negative effect onthe rival firm is mostly marginal. As a result, the R&Dencouragement effect is lower than the R&D discouragement effect;and if innovation is sufficiently important then firm dominance alsodecreases consumer and social surplus. We also provide conditions suchthat an increase in firm dominance increases the probability ofinnovation, essentially because the transfer of innovation incentivesform the rival firm to the dominant firm reduces the probability ofduplicative R&D efforts.