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

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Author Info
Jay Pil Choi ()

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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. There is a discrepancy between the market outcome and the socially optimal outcome which can be explained in terms of externalities conferred on consumers' surplus and the rival firm's profits due to bundling. Finally, the results can be reinterpreted to analyze the relationship between compatibility decisions and R&D incentives in mix-and-match models. Published in: Quaterly Journal of Economics 111/4, 1996, pp. 1153-1181

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 84.

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Date of creation: 1995
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Handle: RePEc:ces:ceswps:_84

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  1. Jay Pil Choi, 2004. "Antitrust Analysis of Tying Arrangements," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. 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!]
  3. 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:
  4. 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)
  5. 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:
  6. Jay Pil Choi, 2007. "Tying in Two-Sided Markets with Multi-Homing," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  7. Reisinger, Markus, 2004. "The Effects of Product Bundling in Duopoly," Discussion Papers in Economics 477, University of Munich, Department of Economics. [Downloadable!]
  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. 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)
  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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