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Tilburg Law and Economics Center

TILEC supports and stimulates academic research on the governance of economic activity. It fosters academically path breaking and practically relevant research and aims to be a leading center worldwide.

Clemens Fiedler

Should we Intervene in the Demand of Firms in the Software Market?
10:45-11:45, T 50A

In this paper, we study how a research and development cost structure that scales imperfectly with the number of customers impacts the strategic decisions of firms. Two firms compete in R&D efforts. Efforts attract customers from the competitor and increase the revenue per customer. The cost of efforts depends partially on the number of customers. We show how this cost structure can generate an inverse u-shaped reaction function of the firms’ efforts. We derive conditions under which both firms can increase their efforts in response to an intervention supporting the market leader and under which such an intervention can only encourage the leader or only the laggard.

The outcome hinges on whether a laggard becomes more or less competitive as they lose market share. This can explain why some markets encourage a small firm to behave submissively while it acts aggressively on other markets. Using three exemplary markets - for hardware, software, and platform technology - we illustrate the importance of this effect to regulators interested in stimulating innovation.

When: 30 May 2018 10:45

End date: 30 May 2018 11:45

Where: Tias building