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M to acquire E: If agreement is reached, E receives and M receives m M (1) : If the o¤er is
rejected, M keeps investing in R&D and, if successful in developing a similar technology, receives
m
M (1) and E receives nothing. In the case M is not successful in getting the innovation, then a
new bargain game begins. In the case when E is in the position to make the …rst o¤er and the
o¤er is rejected, then E could invest K and enter the market to contest M or make a new o¤er in
a new round in the bargain game.
Gans and Stern (2000) show that there is a unique subgame perfect Nash equilibrium in this
bargain game with an agreement reached in the …rst round regardless of who makes the …rst o¤er.
The basic assumption for this unique to exist is that the monopoly pro…ts are greater than the
duopoly pro…ts, that is: M is better o¤ paying the license o¤ered by E; or buying it out, than to
let E enter the market and reduce its monopoly pro…ts.
Another important aspect of the equilibrium, is that the weaker the property rights ( > 0)
the threat M made by continuing expending in R&D, reduces : In that case, the investment in
R&D serves mainly to provide a strategic weapon to reduced the asking price made by E:
3 Toy industry
From the Hong Kong Trade Development Council (2006), children above 12 years old are much
more inclined to use video games than they were in the past. Games now are more short-lived,
incrementing not only the net investment in R&D needed to keep the pace but also the obsolescence
and copyright risks are playing a more important role.
The worldwide toy industry has to face the challenge of reconciling the traditional toy segment
with the ever-faster development of new technologies. Table 1 shows that within the toy industry,
the segment of electronic toys and games is growing considerably faster than any other segment
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