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Preemptive R&D, Rent Dissipation, and the "Leverage Theory."

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Author Info
Choi, Jay Pil

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Abstract

This paper provides a new perspective on the validity of the so-called 'leverage theory.' In a model of preemptive innovation in 'systems' markets, I examine the effect of bundling on R&D incentives. I find that bundling provides a channel through which monopoly 'slack' in one component market can be shifted to another, with the effect of mitigating rent dissipation in the systems market. Bundling can be profitable if this beneficial effect of reduced rent dissipation outweighs the negative effect of intensified price competition. After demonstrating the private optimality of bundling, its welfare implications are considered. Finally, the results can be reinterpreted to analyze the relationship between compatibility decisions and R&D incentives in mix-and-match models. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Publisher Info
Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 111 (1996)
Issue (Month): 4 (November)
Pages: 1153-81
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Handle: RePEc:tpr:qjecon:v:111:y:1996:i:4:p:1153-81

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  1. Jay Pil Choi, 2003. "Antitrust Analysis of Mergers with Bundling in Complementary Markets: Implications for Pricing, Innovation, and Compatibility Choice," Working Papers 03-02, NET Institute, revised Oct 2003. [Downloadable!]
  2. Joseph Farrell and Michael L. Katz., 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Economics Working Papers E00-286, University of California at Berkeley. [Downloadable!]
    Other versions:
  3. Jay Pil Choi, 2006. "Tying in Two-Sided Markets with Multi-Homing," Working Papers 06-04, NET Institute, revised Sep 2006. [Downloadable!]
    Other versions:
  4. Reisinger, Markus, 2004. "The Effects of Product Bundling in Duopoly," Discussion Papers in Economics 477, University of Munich, Department of Economics. [Downloadable!]
  5. Michael D. Whinston, 2001. "Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don't Know," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 63-80, Spring. [Downloadable!] (restricted)
  6. Jay Pil Choi, 2004. "Antitrust Analysis of Tying Arrangements," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Dennis W. Carlton & Michael Waldman, 2005. "Tying, Upgrades, and Switching Costs in Durable-Goods Markets," NBER Working Papers 11407, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Dennis W. Carlton & Michael Waldman, 1998. "The Strategic Use Of Tying To Preserve And Create Market Power In Evolving Industries," University of Chicago - George G. Stigler Center for Study of Economy and State 145, Chicago - Center for Study of Economy and State. [Downloadable!]
    Other versions:
  9. Jay Pil Choi, 1998. "Tying and Innovation: A Dynamic Analysis of Tying Arrangements," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  10. Rey, Patrick & Seabright, Paul & Tirole, Jean, 2001. "The Activities of a Monopoly Firm in Adjacent Competitive Markets: Economic Consequences and Implications for Competition Policy," IDEI Working Papers 132, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2002. [Downloadable!]
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