Integration and Independent Innovation on a Network

UC Berkeley Competition Policy Center Working Paper No. CPC03-37

13 Pages Posted: 9 Feb 2004

See all articles by Joseph Farrell

Joseph Farrell

University of California, Berkeley - Department of Economics

Date Written: July 2003

Abstract

Physical telecom networks are costly and few, traditionally to the point of monopoly. Innovation thrives with many independent minds. So one might hope independent innovators, not only its proprietor M, can offer innovative services on a network, as has been true on the Internet. This issue is central in telecom policy; it also arises elsewhere, including complaints about Microsoft. I try to expound the following key points. Often an unregulated M has ex ante incentives to organize service innovation efficiently. But this incentive breaks down ex post as M can extract an independent J's quasi-rents (Farrell and Michael Katz 2000). Even ex ante, the one monopoly rent theorem (Ward Bowman 1957) fails when M's bottleneck access business is more regulated than its competitive services (e.g., Jean-Jacques Laffont and Jean Tirole 2000). This tempts M to sabotage J's innovations. Quarantining M from the service sector solves these problems, but excludes the firm with (often) the best opportunities and the strongest incentives to innovate. Parity pricing or ECPR (Robert Willig 1979) purports to get the best of both worlds (BoBW). But it seems so hard to implement in innovation markets that one might construe ECPR analysis as reductio ad absurdum for BoBW.

Keywords: Telecom networks, innovation, competition, access pricing

JEL Classification: L5, O3, L96

Suggested Citation

Farrell, Joseph, Integration and Independent Innovation on a Network (July 2003). UC Berkeley Competition Policy Center Working Paper No. CPC03-37, Available at SSRN: https://ssrn.com/abstract=497263 or http://dx.doi.org/10.2139/ssrn.497263

Joseph Farrell (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
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510-642-6615 (Fax)

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