Invention under Uncertainty and the Threat of Ex Post Entry

This paper proposes a theoretical framework for studying radical innovation - the invention of new products - when demand is uncertain. In this framework, under general conditions, the threat of ex post entry by a competitor can deter inventions ex ante. Asymmetric market power in the ex post market exacerbates the problem. The implications of these general results are examined in a series of models intended to represent various aspects of the computer industry. The first of these models shows that an operating system monopolist, by its mere presence, deters the invention of complements, to its own detriment as well as that of society. A second model shows that invention can be deterred if a monopolist in an unrelated market can commit to pure bundle pricing. A third model shows that two firms with competing but horizontally differentiated products can deter each other from adding new features to their products. A fourth model shows that a platform leader wishes to deter invention of complements that could generate alternate platforms.