Demand structure and the incentive to innovate

Recently, it has been shown that an outside innovator of a significant innovation is best off selling his patent rights to an incumbent firm who can then license the innovation to some other firms. Using this strategy of the outside innovator we show that as the number of firms in the industry increases, the incentive to innovate increases if the demand is strictly convex, decreases if the demand is strictly concave and does not change if the demand is linear.

► An outside innovator licenses by first selling property rights to an incumbent firm. ► The incumbent buyer may then sell licenses to other producers with linear royalty. ► The inventor collects more (the same, less) in a more competitive industry only if the demand is convex (concave, linear).