How the Sunk Costs of Incumbents Make Entrants Important for Innovation : A Model and Implications for Policy

The paper clarifies how sunk costs can lead a rational incumbent to innovate less than an entrant. It also demonstrates that competition among incumbents yields less adoption of new and more efficient production technology than competition which includes entrants. The results suggest that policy promoting adoption of next-generation production technology should distinguish among firms based on their sunk costs in current-generation technology and encourage entry by industry outsiders such as startups or firms from other industries