Competition and Innovation in Markets for Technology

We examine the impact of product market competition on innovation in markets for technology. An innovator makes an investment in quality-improving innovation that can be licensed to one (targeted licensing) or all (market-wide licensing) product market competitors. Our model points to a U-shaped relationship between competition in licensee product markets and innovation in the market for technology: at low levels of competition, market-wide licensing is optimal, and competition reduces innovation, whereas at high levels of competition, targeted licensing is optimal and competition increases innovation. Our empirical analysis using a large panel of U.S. data provides clear support for these predictions linking competition, innovation, and licensing. This paper was accepted by Joshua Gans, business strategy. Funding: J.-E. (de) Bettignies gratefully acknowledges financial support by the Social Sciences and Humanities Research Council of Canada [Grant 435-2013-1863]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4574 .