Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, February 15, 2010

Dominance and Innovation

Posted by D. Daniel Sokol

Chander Velu (Cambridge - Judge School of Business) and Sriya Iyer (Cambridge - Econ) address Dominance and Innovation.

ABSTRACT: Do dominant or less dominant firms innovate more? Theoretically it has been shown that within an asymmetric mixed strategy game of a patent race, the less dominant firm invests more than the dominant firm. But the empirical data on patent races is divided. In this paper, we argue that the decisions that concern strategic choice in innovation may be influenced by expected relative returns. Our approach, which we call the returns-based beliefs approach, is based upon subjective probabilities. It combines a decision analytic solution concept and Luce’s (1959) probabilistic choice model. In particular, we show how the use of the returns-based beliefs approach provides support for the thesis that dominant firms invest more in R&D within an asymmetric mixed strategy game. Consequently, we argue that the returns-based beliefs approach is more in line with recent empirical studies of innovation. We also provide empirical e! vidence using UK R&D data across a range of industries from 2001-2006 that shows that firms’ spending on R&D is related more to their own profitability than that of their competitors, which is consistent with the returns-based beliefs approach. We discuss the managerial implications of our theoretical approach and the empirical findings.

February 15, 2010 | Permalink | Comments (1) | TrackBack (0)

Pricing in Matching Markets

Posted by D. Daniel Sokol

George J. Mailath (University of Pennsylvania), Andrew Postlewaite (University of Pennsylvania), and Larry Samuelson (Cowles Foundation, Yale University) examine Pricing in Matching Markets.

ABSTRACT: Different markets are cleared by different types of prices -- a universal price for all buyers and sellers in some markets, seller-specific prices that are uniform across buyers in others, and personalized prices tailored to both the buyer and the seller in yet others. We introduce the notion of premuneration values -- the values in the absence of any muneration (payments) -- created by the buyer-seller match. We characterize the premuneration values under which uniform-price and personalized-price equilibria agree. In this case, we have efficient allocations, including pre-match investment decisions, without the costs of personalized pricing. We then examine the inefficiencies that arise when the premuneration values preclude the agreement of uniform-price and personalized-price equilibria. We view premuneration values as an important consideration in market design.

February 15, 2010 | Permalink | Comments (0) | TrackBack (0)

The Relation between Competition and Innovation -- Why is it Such a Mess?

Posted by D. Daniel Sokol

Armin Schmutzler, University of Zurich - Socioeconomic Institute, asks The Relation between Competition and Innovation -- Why is it Such a Mess?

ABSTRACT: Using a general two-stage framework, this paper gives sufficient conditions for increasing competition to have negative or positive effects on R&D-investment, respectively. Both possibilities arise in plausible situations, even if one uses relatively narrow definitions of increasing competition. The paper also shows that competition is more likely to increase the investments of leaders than those of laggards. When R&D-spillovers are strong, competition is less likely to increase investments. The paper also identifies conditions under which low initial levels of competition make a positive effects of competition on investment more likely. Extending the basic framework, the paper shows that separation of ownership and control, endogenous entry and cumulative investments make positive effects of competition on investment more likely. Imperfect upstream competition weakens the effects of competition on investment.

February 15, 2010 | Permalink | Comments (0) | TrackBack (0)