DP13173 Verifying High Quality: Entry for Sale

Author(s): Pehr-Johan Norbäck, Lars Persson, Roger Svensson
Publication Date: September 2018
Keyword(s): Acquisitions, Innovation, ownership, patents, Quality, start-ups, Verification
JEL(s): G24, L1, L2, M13, O3
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13173

When and how do entrepreneurs sell their inventions? To address this issue, we develop an endogenous entry-sale asymmetric information oligopoly model. We show that low quality inventions are sold directly or used for own entry. Inventors who sell post-entry use entry to credibly reveal information on quality. Incumbents are then willing to pay high prices for high-quality inventions to preempt rivals from obtaining them. Using Swedish data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under preemptive bidding competition, post entry.