Invention under uncertainty and the threat of ex post entry

Published in the European Economic Review, 52(3):387–412, April 2008

Abstract: This paper proposes a theoretical framework for studying the invention of new products when demand is uncertain. In this framework, under general conditions, the threat of ex post entry by a competitor can deter invention ex ante. Asymmetric market power in the ex post market exacerbates the problem. The implications of these general results are examined in a series of examples that represent important markets in the computer industry. The first is a model that shows how an operating system monopolist, by its mere presence, can deter the invention of complements, to its own detriment as well as that of society. The implications of policies such as patent protection, price regulation, and mandatory divestiture are considered. Three additional examples consider the ability of a monopolist in one market to commit to bundling an unrelated product, a pair of horizontally differentiated firms that can add a new feature to their products, and a platform leader that can be challenged in its base market by the supplier of a complementary product.

Published article (ScienceDirect subscribers only)

Working paper 8/24/2006 (older version but freely distributable)

Was there too little entry during the Dot Com Era?

With Brent Goldfarb and David Kirsch

Published in the Journal of Financial Economics, 86(1):100-144, October 2007

Abstract: We present four stylized facts about the Dot Com Era: (1) there was a widespread belief in a "Get Big Fast" business strategy; (2) the increase and decrease in public and private equity investment was most prominent in the internet and information technology sectors; (3) the survival rate of dot com firms is on par or higher than other emerging industries; and (4) firm survival is independent of private equity funding. To connect these findings we offer a herding model that accommodates a divergence between the information and incentives of venture capitalists and their investors. A Get Big Fast belief cascade may have led to overly focused investment in too few internet startups and, as a result, too little entry.

Covered by The New York Times (Leslie Berlin, "Lessons of survival from the Dot-Com attic," p. BU4, 11/23/2008)

Covered by The Wall Street Journal (Lee Gomes, "The Dot-Com Bubble is reconsidered—and maybe relived," p. B1, 11/8/2006)

Covered by (Leslie Taylor, "The dot-com bust? Not as bad as you think," 12/4/2006)

Published article (ScienceDirect subscribers only)

Working paper 12/13/2005 (older version but freely distributable)