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PRODUCT IMPROVEMENT AND TECHNOLOGICAL TYING IN A WINNER-TAKE-ALL MARKET

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  • *The authors acknowledge helpful comments from Kyle Bagwell, Jay Pil Choi, Joe Farrell, Mike Katz, Ilya Segal, Hal Varian, seminar participants at Columbia University, Cornell University, University of British Columbia, University of California, University of North Carolina, University of Rochester, University of Washington, the May 2002 Theoretical Industrial Organization Conference at the University of Texas, the editor and anonymous referees.

Abstract

In a winner-take-all duopoly 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. If the vertically integrated firm is prevented from technologically tying, 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 wins the market. Technological tying enables a vertically integrated firm to foreclose its rival. The welfare implications of technological tying are ambiguous and depend on equilibrium selection.

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