NCPA - National Center for Policy Analysis

Cooperation Or Competition?

January 4, 2001

The developer of a new product or technology has two options: begin a new company to compete in the marketplace, or cooperate with existing companies. The authors of a recent study suggest three factors determine the commercialization strategy pursued by innovators:

  • One is the cost of existing infrastructure such as brand-name recognition, distribution channels, regulatory experience and manufacturing know-how.
  • Whether or not the new development has obvious value.
  • The strength of the ownership of the intellectual property.

Patents increase the likelihood of cooperation. According to the study:

  • Start-ups that have secured patents for their inventions are 23 percent more likely to cooperate with incumbents than those without patent protection.
  • Entrants with no patents that face a low cost of infrastructure will cooperate only 15 percent of the time, while those with patents and high entry costs will cooperate 56 percent of the time.

Industries behave differently as well:

  • Biotechnology developers cooperate more than 55 percent of the time.
  • Electronic and computer software companies cooperate around 25 to 30 percent of the time.
  • Industrial equipment developers cooperate less than 20 percent of the time.

The authors conclude that strong intellectual property rights do not necessarily result in the destruction of existing companies to make room for new ones. These rights actually increase the likelihood of cooperation, not competition.

Source: "Innovation, Cooperation, and Creative Destruction," Economic Intuition, Fall 2000; based on Joshua S. Gans, David H. Hsu and Scott Stern, "When Does Start-Up Innovation Spur the Gale of Creative Destruction?" NBER Working Paper No. w7851, August 2000, National Bureau Of Economic Research, 1050 Massachusetts Avenue, Cambridge, Mass. 02138, (617) 868-3900.

For NBER abstract:


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