Innovation, Rent Extraction, and Integration in Systems Markets*

We consider innovation incentives in markets where ¢nal goods are systems comprising two strictly complementary components, one of which is monopolized. We focus on the case in which the complementary component is competitively supplied and innovation is important. We explore ways in which the monopoly may have incentives to extract e¤ciency rents in the competitive sector, thus weakening or destroying incentives for independent innovation. We discuss how these problems are a¡ected if the monopolist integrates into supply of the complement.