Tying and Innovation: A Dynamic Analysis of Tying Arrangements

Columbia University Economics Disc. Paper No. 9798-15

28 Pages Posted: 8 Jun 1999

See all articles by Jay Pil Choi

Jay Pil Choi

Michigan State University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 1998

Abstract

This paper analyzes the effects of tying arrangements on R&D incentives. It shows that tying is a means through which a firm can commit to more aggressive R&D investment in the tied goods market. Tying also has the strategic effect of reducing rivals' incentives to invest in R&D. The strategy of tying is a profitable one if the gains, via an increased share of dynamic rents in the tied goods market, exceed the losses that result from intensified price competition in the market. The welfare implications of tying, and consequently the appropriate antitrust policy, are shown to depend on the nature of R&D competition. This paper analyzes the effects of tying arrangements on R&D incentives. It shows that tying is a means through which a firm can commit to more aggressive R&D investment in the tied goods market. Tying also has the strategic effect of reducing rivals' incentives to invest in R&D. The strategy of tying is a profitable one if the gains, via an increased share of dynamic rents in the tied goods market, exceed the losses that result from intensified price competition in the market. The welfare implications of tying, and consequently the appropriate antitrust policy, are shown to depend on the nature of R&D competition.

JEL Classification: L21, L22

Suggested Citation

Choi, Jay Pil, Tying and Innovation: A Dynamic Analysis of Tying Arrangements (August 1998). Columbia University Economics Disc. Paper No. 9798-15, Available at SSRN: https://ssrn.com/abstract=148460 or http://dx.doi.org/10.2139/ssrn.148460

Jay Pil Choi (Contact Author)

Michigan State University - Department of Economics ( email )

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