| Abstract: |
When an idea for a new product arrives, will it be developed and by whom? We
develop a spatial model in which an idea arrives to a researcher within the
firm. Products are imperfectly substitutable, so that developing a new product
that is close to an existing product will cannibalize some amount of the
existing product's sales, and the cost to develop a new product is higher the
further it is from an existing product. Together these forces mean that there
exist ideas that can be developed more efficiently by the researcher as a
spin-out than by the firm (due to the cost of fit) but that the firm prefers
to buy out the researcher and either develop itself or discard (due to the
potential loss from cannibalization). These inefficient outcomes occur for
ideas at intermediate distance from the firm's existing portfolio, and are
likelier and more severe the higher is demand and the greater the degree of
substitutability. |