American Economic Review, Vol. 97, pp. 1703-30, December 2007
This paper, the 2008 Compass Lexicon Prize winner, looks at how competition policy may affect technological innovation.
When competition policy can protect new entrants from leading firms without reducing the rewards to leading firms, there will be more innovation. Consumers will benefit.
In some high-tech industries, consumers most value, want or need service or goods if only one firm provides them. Competition takes the form of competing “for the market.”
Early on, several firms compete to see which firm consumers will choose. Later, that form of competition eases up after consumers pick a winner.
Competition policy might choose to protect new entrants from leading firms, increasing their rewards but reducing those of the leading firms.
Sometimes, competition policy might protect new entrants from leading without reducing the rewards to leading firms. It might even raise the profits of both leaders and new entrants and encourage innovation.
A more aggressive competition policy might help consumers by encouraging innovation.