Cumulative Innovation and Antitrust Policy

We develop a stylized model of a Schumpeterian industry, characterized by cumulative innovation and a succession of incumbent monopolists, to address issues in competition policy toward abuse of dominance. Incumbents' R&D investments increase future social surplus flows as well as the incumbents' tenure in the market, thus generating both positive and negative intertemporal externalities. We find that conduct that appropriates surplus (“extraction”) increases innovation and surplus growth. By contrast, conduct that lengthens incumbent tenure (“extension”) increases innovation and surplus growth when the net intertemporal externality is positive but decreases innovation and surplus growth when the net intertemporal externality is negative