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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, 1 examine the effect of bundling on R&D incentives. 1 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.

Suggested Citation

  • Jay Pil Choi, 1995. "Preemptive R&D, Rent Dissipation and the "Leverage Theory"," CESifo Working Paper Series 84, CESifo.
    • Handle: RePEc:ces:ceswps:_84
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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, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 33, pages 2145-2220, Elsevier.
    4. Choi, Jay Pil, 2003. "Bundling new products with old to signal quality, with application to the sequencing of new products," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1179-1200, October.
    5. Jay Pil Choi, 2008. "Mergers With Bundling In Complementary Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 553-577, September.
    6. Joseph Farrell & Michael L. Katz, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 413-432, December.
    7. 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.
    8. Fumagalli, Chiara & Motta, Massimo, 2020. "Tying in evolving industries, when future entry cannot be deterred," International Journal of Industrial Organization, Elsevier, vol. 73(C).
    9. 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.
    10. 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.
    11. Kim, Sang-Hyun & Choi, Jay Pil, 2015. "Optimal compatibility in systems markets," Games and Economic Behavior, Elsevier, vol. 90(C), pages 106-118.
    12. 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.
    13. Jay Pil Choi, 2010. "Tying In Two‐Sided Markets With Multi‐Homing," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 607-626, September.
    14. Reisinger, Markus, 2004. "The Effects of Product Bundling in Duopoly," Discussion Papers in Economics 477, University of Munich, Department of Economics.
    15. Chiara Fumagalli & Massimo Motta, 2024. "Economic Principles for the Enforcement of Abuse of Dominance Provisions," Working Papers 1431, Barcelona School of Economics.
    16. 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.
    17. Salman Ali & Syed Mizanur Rahman, 2020. "R&D Expenditure in a Competitive Landscape: A Game Theoretic Approach," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 19(1), pages 47-60, June.
    18. 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.
    19. 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.
    20. Lee, Gwanghoon, 2002. "R&D inefficiency with bundling in systems markets," Economics Letters, Elsevier, vol. 75(1), pages 25-30, March.
    21. Jay Pil Choi, 2004. "Antitrust Analysis of Tying Arrangements," CESifo Working Paper Series 1336, CESifo.
    22. 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.
    23. Martin, Xavier, 2013. "Preemption and entry timing," Other publications TiSEM 0dd6d7f4-df7d-4acb-81b3-d, Tilburg University, School of Economics and Management.
    24. 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.

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