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

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  • Jay Pil Choi

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.

Suggested Citation

  • Jay Pil Choi, 1996. "Preemptive R&D, Rent Dissipation, and the "Leverage Theory"," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1153-1181.
  • Handle: RePEc:oup:qjecon:v:111:y:1996:i:4:p:1153-1181.
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    Cited by:

    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.
    2. Sang Kim & Dong-Ju Kim, 2005. "One-phone service and mobile market foreclosure," Netnomics, Springer, vol. 7(1), pages 59-68, April.
    3. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
    4. Farrell, Joseph & Katz, Michael L, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 413-432, December.
    5. Lybecker Kristina M. & Lemke Robert J., 2007. "Extending Monopoly Power under Joint Production: A Case Study of the Red Cross and the Blood Centers of America," Journal of Industrial Organization Education, De Gruyter, vol. 2(1), pages 1-23, October.
    6. Arribas, I. & Urbano, A., 2017. "Multiproduct trading with a common agent under complete information: Existence and characterization of Nash equilibrium," Journal of Economic Theory, Elsevier, vol. 167(C), pages 14-38.
    7. Kim, Sang-Hyun & Choi, Jay Pil, 2015. "Optimal compatibility in systems markets," Games and Economic Behavior, Elsevier, vol. 90(C), pages 106-118.
    8. 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.
    9. Jay Pil Choi, 2006. "Tying in Two-Sided Markets with Multi-Homing," Working Papers 06-04, NET Institute, revised Sep 2006.
    10. Reisinger, Markus, 2004. "The Effects of Product Bundling in Duopoly," Discussion Papers in Economics 477, University of Munich, Department of Economics.
    11. 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.
    12. Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
    13. Jay Pil Choi, 2004. "Tying and innovation: A dynamic analysis of tying arrangements," Economic Journal, Royal Economic Society, vol. 114(492), pages 83-101, January.
    14. Lee, Gwanghoon, 2002. "R&D inefficiency with bundling in systems markets," Economics Letters, Elsevier, vol. 75(1), pages 25-30, March.
    15. Jay Pil Choi, 2004. "Antitrust Analysis of Tying Arrangements," CESifo Working Paper Series 1336, CESifo Group Munich.
    16. Martin, Xavier, 2013. "Preemption and entry timing," Other publications TiSEM 0dd6d7f4-df7d-4acb-81b3-d, Tilburg University, School of Economics and Management.
    17. 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.
    18. Shi, Guanming & Chavas, Jean-Paul & Stiegert, Kyle W., 2008. "An Analysis of Bundle Pricing: The Case of the Corn Seed Market," Staff Papers 92212, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.

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