Product Improvement and Technological Tying in a Winner-Take-All Market (2005.10)

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CPDP- 17-E(PDF:207KB)	"Product Improvement and Technological Tying in a Winner-Take-All Market" (2005.10) Richard J. Gilbert(University of California) Michael H. Riordan(Columbia University) In a winner-take-all duopoly market for systems in which .rms invest to improve their products, a vertically integrated monopoly supplier of an essential system component may have an incentive to advantage itself by technological tying; that is, by designing the component to work better in its own system. If the vertically integrated firm is prevented from technologically tying, then there is an equilibrium in which the more efficient firm invests and serves the entire market. However, another equilibrium may exist in which the less efficient cient firm invests and captures the market. Technological tying enables a vertically integrated firm to foreclose its rival. The welfare implications of technological tying are ambiguous and depend on the asymmetric qualities of the system suppliers and on equilibrium selection. JEL classification codes: L1, L41 Keywords: systems competition, foreclosure, innovation.

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Contents，Author

"Product Improvement and Technological Tying in a Winner-Take-All Market" (2005.10)
Richard J. Gilbert(University of California)
Michael H. Riordan(Columbia University)
In a winner-take-all duopoly market for systems in which .rms invest to improve their products, a vertically integrated monopoly supplier of an essential system component may have an incentive to advantage itself by technological tying; that is, by designing the component to work better in its own system. If the vertically integrated firm is prevented from technologically tying, then there is an equilibrium in which the more efficient firm invests and serves the entire market. However, another equilibrium may exist in which the less efficient cient firm invests and captures the market. Technological tying enables a vertically integrated firm to foreclose its rival. The welfare implications of technological tying are ambiguous and depend on the asymmetric qualities of the system suppliers and on equilibrium selection.
JEL classification codes: L1, L41
Keywords: systems competition, foreclosure, innovation.