Three essays on competition policy and innovation

This thesis looks at the various activities of competition authorities, such as the United Kingdom’s Office of Fair Trading or the US Federal Trade Commission, and shows examples of how a tough, competition-promoting stance can boost innovation. Each chapter considers one of the three main branches of competition policy: mergers, agreements between competitors and the conduct of dominant firms. Chapter 2 shows how a government can foster innovation by tightening merger restrictions. A detailed model of innovation is used to show how merger policy affects market structure over the life-cycle of an industry. We show that mergers are only possible in later periods, once incumbent firms have established a technological lead over potential entrants. This means that the expectation of future rents from a relaxed merger policy encourages entry in the early stages. This can reduce R&D in the early stages and, as latter R&D builds on initial discoveries, limit innovation at the end of the life-cycle. We show that, in large markets, a government that aims to promote innovation should ban mergers when early innovation is sufficiently important for later research. In chapter 3 we look at the effects of R&D cooperation among competing firms on technology choice. We demonstrate how firms in a duopoly can ensure that each adopts different technologies by agreeing, prior to conducting R&D, to share the results of their research. This has the effects of reducing product substitutability and thereby softening competition and increasing profits. We show that this can reduce innovation, consumer welfare and total welfare. In Chapter 4, we look at a systems market and show how an incumbent monopoly supplier of a primary product can protect its position through the technological tying of complementary goods.