Innovation, Rent Extraction, and Integration in Systems Markets

We consider innovation incentives in markets where final goods comprise two strictly complementary components, one of which is monopolized. We focus on the case in which the complementary component is competitively supplied, and in which innovation is important. We explore ways in which the monopoly may have incentives to confiscate efficiency rents in the competitive sector, thus weakening or destroying incentives for independent innovation. We discuss how these problems are affected if the monopolist integrates into the competitive sector.