نوآوری، ساختار بازار و مشکل توقیف: مشوق های سرمایه گذاری و هماهنگی

I analyze the innovation incentives under monopoly and duopoly provision of horizontally differentiated products purchased via bilateral negotiations, integrating the market structure and innovation literature with the holdup literature. I show that competition can improve local incentives for non-contractible investment. Because innovation levels are generally strategic substitutes, however, there can be multiple duopoly equilibria. In some circumstances, monopoly can provide a coordination device that can lead to greater expected welfare despite inferior local innovation incentives. The conditions for this to be the case, however, are quite restrictive.

While many papers have analyzed the effect of market structure on innovation incentives (Arrow, 1962, Dasgupta and Stiglitz, 1980 and Bulow, 1982; and many others), there has been very little analysis of this issue in markets where trade occurs in bilateral contracts rather than in a spot market. Most prior papers dealing with bilateral contracts and non-contractible investments have assumed the existence of bilateral monopoly (Williamson, 1985, Tirole, 1986, Grossman and Hart, 1986 and Hart and Moore, 1990 among others), bypassing the question of how market structure affects investment incentives. When customers are not final consumers, but rather firms purchasing inputs, these firms will often negotiate with multiple suppliers. In fact, this paper grows out of analysis of a proposed merger between the two dominant suppliers of accounting software for large law firms. In that market, law firms would negotiate with two different software firms over prices for a customized version of that firm's software. The welfare consequences of this merger hinged to a large extent on how the merger would affect the incentives of the merged firm to improve each product. Similar negotiations occur in all types of business planning software. Companies such as Oracle or PeopleSoft offer large, customizable software packages that perform a myriad of essential tasks such as billing and accounting, human resources management, supply chain management and many others. Large companies do not buy these products “off the shelf.” Rather, they send out a request for proposal to several firms and negotiate with each one. Health maintenance organizations negotiate with multiple hospitals in an area to choose which one will be their exclusive provider. Corporations often bargain with many different law firms before choosing which one will represent them in a certain class of cases. Indeed, any time a business buys a service or a customized good that cannot be easily resold, there can be individualized pricing resulting from direct negotiations with the supplier. In markets where trade is governed by bilateral contracts, the issue of output distortion does not arise because trade is negotiated individually.1 The effect of market structure on welfare is only through its effect on non-contractible investments. Moreover, the effect of market structure on product innovation incentives is substantially different when there are no set prices. For example, the “replacement effect” and the “product inertia effect” that greatly influence innovation incentives in standard models (Greenstein and Ramey, 1998 is one such example) are not present in this paper. I use a model with a continuum of consumers uniformly distributed along the unit interval and two products, A and B, located at the endpoints. Consumers demand at most one unit of one product. Each product has a common value to all customers, which a firm can increase through quality-improving investment. Each product also has an idiosyncratic value to each consumer based on the consumer's location. When different firms own A and B, each firm bargains with each customer (under complete information), who chooses the product that provides her with the greatest net surplus. If one firm owns both products, the firm offers each consumer only the product that a given consumer values more. Consumers always have the option of buying a third product (which could be in-house production), but this product provides less gross value (i.e., not net of price) to all consumers than does either product A or B. So, while this third option is every consumer's outside option under monopoly ownership, it has no effect on the duopoly bargaining. In the context of this model, I show that competition alleviates the holdup problem by providing superior incentives for non-contractible investment. Since only the sellers are making non-contractible investments, if they had all the bargaining power, investment incentives would be optimal. Because the split of the surplus is determined by an outside option bargaining game, however, a seller only gets the entire marginal surplus from product improvements (though, not the entire total surplus) if the buyer has a binding outside option (an option that gives the buyer at least half the total surplus available from trade with its preferred seller). Otherwise, the seller only receives half the marginal surplus from product improvements. Competition alleviates the holdup problem because competition increases the options available to buyers, making it more likely that a buyer will have a binding outside option when negotiating with its preferred supplier. When more buyers have binding outside options, the marginal return (to the seller) from product improvement is closer to the social optimum. Competition may not always increase total welfare, however, because it can create a coordination problem. There can be multiple equilibria because the firms' innovation levels are (usually) strategic substitutes. This is due to a market share effect; the more my rival innovates the larger is her market share and the smaller is mine, reducing my incentive to innovate. If the degree of product differentiation and innovation costs are small, then the incentive to concentrate all innovation on one product is strong enough that in monopoly and duopoly, only one product is developed. Similarly, when product differentiation and innovation costs are large, the benefits to innovating both products are large, both in terms of meeting the needs of all customers and for keeping innovation costs down (since these costs are convex). So, in duopoly and monopoly, both products are developed. For intermediate levels of product differentiation and innovation costs, however, there can be multiple duopoly equilibria. In this case, the equilibrium with the most asymmetric product development generates the most social welfare because it has the least duplicative investment. If the value of the third option is large enough (the monopolist gets a large enough share of the marginal benefits from innovation), then the monopolist may choose asymmetric development when a social planner would. Because monopoly innovation incentives are worse (locally) than in duopoly, this outcome is still worse than the asymmetric duopoly equilibrium, even if it is better than the symmetric duopoly equilibrium. This is not the first paper to study the relationship between competition and non-contractible investment incentives. Felli and Roberts (2000) also show that competition can alleviate the holdup problem when only sellers invest. Their model assumes that sellers can make take it or leave it offers to buyers, guaranteeing that sellers get the entire marginal surplus from the transaction (whether there is competition or not). Like Felli and Roberts (2000), Cole et al. (2001) model the effect of competition in a model with match specific investments (not product innovation investments as in this paper). An additional difference between their paper and this one is that their analysis of competition considers the effect of adding closer substitutes, whereas in this paper the number of available products is fixed, but there is more competition when the products are under separate ownership. Neither of the above papers considers the effect of ownership on the holdup problem. Che and Gale (2000) show that competition in the form of contests can help improve sellers' incentives to make non-contractible cooperative investments.2Inderst and Wey (2003) analyze the effect of market structure on production technology choice with negotiated prices. Their model uses a different bargaining solution (Shapley value) and focuses on how different upstream and downstream market structures affects the seller's choice between a high fixed and low marginal cost technology versus low fixed cost and high marginal cost technology rather than on how market structure affects a seller's incentive to invest in product quality. The plan of the rest of the paper is as follows. Section 2 develops the duopoly model, while Section 3 develops the monopoly model. Section 4 discusses the welfare comparisons between the two. Section 5 concludes. Appendix A describes the monopoly outcome for all possible parameter constellations. The proof of the second proposition is in Appendix B.

Analyzing the welfare effects of market structure in markets where bilateral contracting is the norm is very different from analyzing these effects in markets where spot market transactions predominate. With efficient bilateral contracting, there is no ex post allocation inefficiency; market structure only affects welfare when it affects the hold up problem. Because of the holdup problem, firms will have insufficient incentives to improve the quality of their products. In this paper's model, competition among suppliers reduces this problem. Competition, however, brings with it the problem of multiple equilibria. When that is the case, the more asymmetric is the development of the two products the greater is welfare. If the value of consumers' third option is large enough, then monopoly can lead to an asymmetric development outcome that is superior to the symmetric duopoly equilibrium. If the symmetric duopoly equilibrium occurs with large enough probability, then the coordination benefits of monopoly might make it preferable to duopoly. Of course, the paper assumes that a firm's ability to develop its product(s) (the development cost function) is independent of market structure. If innovation synergies occur when one firm owns both products, then this makes monopoly more advantageous than the model in this paper predicts. In fact, because (efficiently) negotiated trade eliminates the effect of market structure on allocation efficiency, it will be much easier for synergies to result in greater welfare with less competition than in markets governed by fixed price transactions. The paper also assumes that ε, the relative preference parameter, is common knowledge. While the suppliers often know much more about their products than customers, and often learn a great deal about how the customer will use the product in the sales process, the customer will always know more about its valuation for each product than the suppliers. Because I assumed away this type of information asymmetry, there were no bargaining failures in the model. Since bargaining failures reduce welfare, the effect of market structure on the incidence of bargaining failures is important. The direction of this effect is unclear. On the one hand, under monopoly the disagreement option is worse for the buyer, so it has a greater incentive to avoid a bargaining failure. On the other hand, the consequences of bargaining failure in this situation are more severe. Bargaining failures could also impact the results to the extent they affect innovation incentives. The social planner will always weigh bargaining failures more severely than the monopolist since the monopolist only bears part of the cost of a failure. Asymmetric information could also affect innovation incentives if it creates a business stealing incentive in duopoly. This is unlikely to occur, however, since it can only happen if an indifferent customer must pay a positive price for either product. Since the most likely form of bargaining failure from asymmetric information is delay, there should be no business stealing incentive even with asymmetric information. That said, analyzing more precisely the effect of asymmetric information would be quite interesting.