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Competing or Colluding in a Stochastic Framework

  • Adriana Breccia
  • Hector Salgado-Banda
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    This paper addresses the issue of anticompetitive and collusive practices in a continuous-time real option framework. We extend the symmetrical duopoly under uncertainty model by Dixit and Pindyck (1994), by granting a patent to the first innovator that files an application. The patent-investment race model is used to focus on long-term collusive agreements signed under a cooperative bargaining structure. The contributions are as follows. First, we show that, in a stochastic framework, competition always leads to different forms of inefficiency. Second, it is proved that, when entrepreneurs can sign long-term contracts via cooperative bargaining, collusion is always beneficial ex-ante since inefficiency disappears. Third, we show that whilst collusion always delays innovation, it does not necessarily delay competition. Depending on a number of economic, as well as firm-specific factors, collusion can actually accelerate competition.

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    File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0504.pdf
    File Function: First version, 2005
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    Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0504.

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    Date of creation: Jan 2005
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    Handle: RePEc:bbk:bbkefp:0504
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    1. Katharine E. Rockett, 1990. "Choosing the Competition and Patent Licensing," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 161-171, Spring.
    2. Nicholas Bloom & John Van Reenen, 2002. "Patents, Real Options and Firm Performance," Economic Journal, Royal Economic Society, vol. 112(478), pages C97-C116, March.
    3. Kovacic, William E. & Shapiro, Carl, 1999. "Antitrust Policy: A Century of Economic and Legal Thinking," Competition Policy Center, Working Paper Series qt5zb4g387, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    4. Jean O. Lanjouw & Josh Lerner, 1997. "The Enforcement of Intellectual Property Rights: A Survey of the Empirical Literature," NBER Working Papers 6296, National Bureau of Economic Research, Inc.
    5. Gilbert, Richard & Tom, Willard K., 2001. "Is Innovation King at the Antitrust Agencies? The Intellectual Property Guidelines Five Years Later," Competition Policy Center, Working Paper Series qt8zv6b8c5, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    6. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
    7. Weeds, H., 2000. "Strategic Delay in a Real Optimna Model of R&D Competition," The Warwick Economics Research Paper Series (TWERPS) 576, University of Warwick, Department of Economics.
    8. Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-79, December.
    9. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2002. "Symmetric Equilibrium Strategies in Game Theoretical Real Option Models," Discussion Paper 2002-81, Tilburg University, Center for Economic Research.
    10. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    11. Reiko Aoki & Jin-Li Hu, 1996. "Allocation of Legal Costs and Patent Litigation: A Cooperative Game Approach," Industrial Organization 9612001, EconWPA.
    12. Michael J. Meurer, 1989. "The Settlement of Patent Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 77-91, Spring.
    13. Eduardo S. Schwartz, 2003. "Patents and R&D as Real Options," NBER Working Papers 10114, National Bureau of Economic Research, Inc.
    14. Marshall, Robert C & Meurer, Michael J & Richard, Jean-Francois, 1994. "Litigation Settlement and Collusion," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 211-39, February.
    15. Suzanne Scotchmer & Jerry Green, 1990. "Novelty and Disclosure in Patent Law," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 131-146, Spring.
    16. Reiss, Ariane, 1998. "Investment in Innovations and Competition: An Option Pricing Approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 635-650.
    17. Cooter, Robert D & Rubinfeld, Daniel L, 1989. "Economic Analysis of Legal Disputes and Their Resolution," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1067-97, September.
    18. Crampes, Claude & Langinier, Corinne, 2002. "Litigation and Settlement in Patent Infringement Cases," Staff General Research Papers 5231, Iowa State University, Department of Economics.
    19. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 619-643, February.
    20. F. M. Scherer & Jayashree Watal, 2002. "Post-TRIPS Options for Access to Patented Medicines in Developing Nations," Journal of International Economic Law, Oxford University Press, vol. 5(4), pages 913-939, December.
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