The business stealing effect leads to socially excessive entry in R&D markets
the verdict
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Economic literature discusses strategic distortions and inefficiencies related to entry in innovation markets, but the provided sources do not fully establish that free entry universally leads to socially excessive entry.
The value of innovation during crises can be extraordinary. While high payoffs increase the rate of innovation, they also induce a strategic distortion in its direction. High payoffs attract entry by innovators, making the R\&D supply side more competitive. This competition endogenously shifts effort toward less promising but quicker-to-finish inventions. We develop a dynamic structural model quantifying the magnitude of this distortion, even when the value of potential inventions are not observed in the data. As a case study, we estimate entry of vaccines versus therapeutics and novel versus repurposed compounds developed during the COVID-19 pandemic, showing substantial distortion away from vaccines. Policy remedies include advance purchase commitments based on ex-ante value, targeted research subsidies, or antitrust exemptions for joint research ventures.
# Free Exit And Social Inefficiency
Journal of Business & Economics Research (JBER). Published: 2010-12-28. 2 citations.
## Authors
- Linus Wilson (University of Louisiana at Lafayette): h-index 11; 453 citations; corresponding author
## Topics
- Merger and Competition Analysis
- Economic theories and models
- Digital Platforms and Economics
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# Free Exit And Social Inefficiency
## Abstract
show that free entry is socially excessive when firms have fixed costs and produce identical goods. That is because rival firms fail to externalize the business stealing costs they impose on their rivals. This paper extends that model by assuming that there are two states of demand. It is proven that weakly too few firms exit voluntarily when demand realizations are low and some of the fixed costs are recoverable. If there is any voluntary exit, social welfare could strictly rise by forcing more firms to exit the industry.
## INTRODUCTION
ince Maniw and Whinston (1986) , it has been known that free entry often leads to socially wasteful investment in homogeneous goods industries. That study shows how, under reasonable conditions with the lost profits of rival firms, the business ste
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