The Effects of Integration on R & D Incentives in Systems Markets

We consider a systems market where two complementary components must be used in combination to provide valuable services. The market for the first component is monopolized whereas the market for the second is potentially served by multiple firms. We show that integration of the monopolist into the competitive complementary market may distort incentives for R&D, reducing total economic welfare. We thank Valter Sorana and participants in the 4 Kiel Workshop in Economics on the Microeconomics of the New Economy for helpful comments and suggestions. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. * Department of Economics, Michigan State University, 101 Marshall Hall, East Lansing, MI 48824, e-mail: [email protected]. ** Korea Information Society Development Institute, 1-1 Juam, Gwachun, Gyunggi 427-710, Republic of Korea, e-mail: [email protected]. *** Payment System Studies, Research Dept., Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045-0001, e-mail: [email protected], tel: (212) 720-6178.