Acquisitions, Entry and Innovation in Oligopolistic Network Industries

In industries with network effects, incumbents’ installed bases create barriers to entry that discourage entrepreneurs from developing new innovations. Yet, entry is not the only commercialization route for entrepreneurs. We show that the op- tion of selling to an incumbent increases the innovation incentives for entrepreneurs when the network effects are strong and incumbents compete to preemptively ac- quire innovations. Thus, we establish that network effects and installed bases do not necessarily restrict the innovation incentives, and that network effects promote acquisitions over entry.