Dynamic Incompatibility, Bundling and Innovation in Systems Markets

Gwanghoon Lee
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Gwanghoon Lee: KISDI

Korean Economic Review, 2000, vol. 16, 165-177

Abstract: This paper analyzes R&D incentives in systems markets where two or more complementary components must be used in combination to serve consumers. I consider the situation where innovation in one component may result in incompatibility with other components. Bundling components turns out to improve R&D incentives regardless of whether components are subject to dynamic compatibility or incompatibility. Bundling, however, improves R&D incentives more in the case of dynamic incompatibility than in the case of dynamic compatibility. These results provide economic justifications of bundling in systems markets when strong complementarity between components makes them subject to the dynamic incompatibility.

Keywords: Systems market; Bundling; Dynamic Incompatibility; R&D; Innovation (search for similar items in EconPapers)
JEL-codes: L0 L4 (search for similar items in EconPapers)
Date: 2000
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