Exclusionary Conduct of Dominant Firms, R&D Competition, and Innovation

Exclusionary Conduct of Dominant Firms, R&D Competition, and Innovation – Jonathan B. Baker (American University – Washington College of Law)

ABSTRACT: This paper evaluates the innovation consequences of antitrust enforcement against the exclusionary conduct of dominant firms through a Nash equilibrium model of research and development (R&D) competition to create new products. In the two-firm model, whether one firm regards the other firm’s R&D investment as a strategic complement or strategic substitute turns on an increasing differences condition: whether the first firm’s incremental benefit of increased R&D investment is greater if its rival’s R&D effort succeeds or if its rival’s R&D effort fails. Antitrust prohibitions on pre-innovation exclusion and post-innovation exclusion are found to be effective in different strategic settings: preventing dominant firm exclusion of its rival from post-innovation (pre-innovation) product market competition increases the overall likelihood of industry innovation if the dominant firm’s best response function slopes upward (downward) and is sufficiently steep, or if its rival’s best response function slopes downward (upward) and is sufficiently steep. An antitrust prohibition on dominant firm exclusion of its rival from R&D competition increases the overall likelihood of industry innovation if the dominant firm regards rival R&D investment as a strategic complement.