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

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  • Gilbert, Richard J
  • Riordan, Michael H

Abstract

In a winner-take-all duopoly market for systems in which firms 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 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.

Suggested Citation

  • Gilbert, Richard J & Riordan, Michael H, 2005. "Product Improvement and Technological Tying in a Winner-Take-All Market," Department of Economics, Working Paper Series qt3v04b2rx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:econwp:qt3v04b2rx
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    References listed on IDEAS

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    1. Oliver Hart & Jean Tirole, 1990. "Vertical Integration and Market Foreclosure," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990 Micr), pages 205-286.
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    Cited by:

    1. Marie-Laure Allain & Claire Chambolle & Patrick Rey, 2016. "Vertical Integration as a Source of Hold-up," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 1-25.
    2. Chen, Yongmin & Sappington, David E.M., 2009. "Designing input prices to motivate process innovation," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 390-402, May.
    3. Buechel, Berno & Klein, Jan, 2014. "Do Consumers' Preferences Really Matter? - A Note on Spatial Competition with Restricted Strategies," MPRA Paper 55288, University Library of Munich, Germany.
    4. David Sappington, 2006. "Regulation in Vertically-Related Industries: Myths, Facts, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 28(1), pages 3-16, February.
    5. Yongmin Chen & David E. M. Sappington, 2010. "Innovation In Vertically Related Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 58(2), pages 373-401, June.

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