Acquisitions, entry, and innovation in oligopolistic network industries

- We model commercialization and innovation decisions in network industries.
- Strong network effects and installed bases hinder entry and innovation incentives.
- Innovation is instead driven by incumbents competing to acquire entrants.
- Installed bases and network effects thus need not reduce innovation incentives.

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 option of selling to an incumbent increases the innovation incentives for entrepreneurs when the network effects are strong and incumbents compete to preemptively acquire 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.