Abstract

HERRERA ECHEVERRY, Hernán. Innovation and incumbent failure: an illustration in the telecommunications industry in Colombia. Cuad. Adm. [online]. 2008, vol.21, n.37, pp.161-183. ISSN 0120-3592.

This paper analyzes the determinants of incumbent failure using the game theory. In the suggested schema, an entrant firm decides to confront a monopolist firm by offering second-generation technology. The firm with the monopoly offers first-generation technology so it must decide whether to enter second-generation technology into the market or not. The paper concludes that the share of the existing market and the expected magnitude of the demand that will remain with the older technology are barriers against an established firm deciding to invest in an innovation. The probability that an established firm would invest in such innovation is inverse to the entrant firm’s probability of success, to the amount of the investment, and to the magnitude of the profits that the established firm would make with its current product if the entrant company is successful. The article illustrates the theoretical exposition by using the results of introducing mobile cellular telephony in the telecommunications industry in Colombia.

Keywords : Incumbent failure; game theory; backward induction; signaling; entrant firms; established firms; monopolies.

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