In this benchmark, the incumbent fully internalizes the profits of the start-up, which removes all the inefficiencies present in our setup but for those stemming from the fact that the effects on consumer surplus are neglected.
Considering the knowledge generation decision of the incumbent at stage 1,we denote with Kmðα and Ks the optimal investments assuming that the employee stays in the firm or leaves the firm, respectively. Furthermore, we denote the optimal investment choice for a given α, taking into account the implications for start-up formation, with K*(α). The following Proposition characterizes K*(α), as well as the resulting pattern of start-up formation, for different values of α.