Acquisitions in a patent contest model with large and small firms

Abstract

Big companies and small innovation factories possess different advantages in a patent contest. While large firms typically have better access to product markets, small firms often have a superior R&D efficiency. These distinct advantages immediately lead to the question of cooperations between firms. In this paper, we model a patent contest with heterogeneous firms. In a pre-contest acquisition game large firms bid sequentially for small firms to combine respective advantages. Sequential bidding allows the first large firms to bid strategically to induce a reaction of its competitor. For high efficiencies both large firms prefer to acquire immediately leading to a symmetric market structure. For low efficiencies strategic waiting of the first large firm leads to an asymmetric market structure even though the initial situation is symmetric. We also discuss two different timing setups of the acquisition stage. In all setups, acquisitions increase the chances for a successful innovation.