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in developing new innovations in the electronic games segment, that would help it to extend its
current market power to the this speci…c niche. If this is the case we can argue that Radica in
particular, but all the other …rms as well, will see their pro…ts deteriorate. Depending on the degree
of success Mattel has it is not di¢ cult to assume that for current …rms serving this market, but
particular Radica, it will be unpro…table to continue investing in R&D to compete with Mattel.
In terms of the Gans and Stern model, if Mattel develops the innovation …rst: d R (1) < K, where
subindex R stands for Radica.
This assumption yields an important fact regarding Gans and Stern model, but also relevant
for the case we are analyzing here: Mattel is an important threat for Radica if Mattel succeeds
in developing capabilities in the electronic toys segment. Of course, Radica (as player E in Gans
and Stern framework) knows that this is a credible threat, given Mattel’s size and power in the
toy industry. In this context, as in Gans and Stern model, Radica needs to balance the pro…ts
it is already enjoying versus the pro…ts it will obtain negotiating with Mattel (e.g. license or
acquisition). The fact that Mattel had already developed electronic toys (e.g. AcceleRacer) is a
strong signal that the threat is credible.
Following this idea, , which is the value of the agreement between Mattel and Radica, compen-
sate, as in the Gans and Stern model, the expected value of the pro…ts Radica will enjoy competing
with Mattel (and others) in this speci…c segment, versus selling the license or being taken over by
Mattel. For Mattel, on the other hand, balanced the pro…ts it will enjoy in a segment where it
would not have monopoly power versus the up-front cash payment it has to make for Radica.
Although the speci…c costs and bene…ts are impossible to calculate without detailed information
for each …rm, the assumptions of Gans and Stern’s model we discuss in this section seems, at the
minimum, reasonable.
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