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Teaching notes for chapter 16

From a positive point of view, the central question addressed in this chapter is the relation between market structure and R&D: first, how market structure affects the level and direction of R&D; second, how R&D determines the evolution of market structure. The first part of the central question has been given extensive treatment, both theoretically and empirically. (On the empirical literature, see Levin's chapter in the "Handbook of Industrial Organization" and Sutton's critique in his recent "Technology and Market Structure".) The second part of the question--the dynamics of R&D and market structure--is relatively more recent in terms of economics research. Specifically, one central question is whether the dynamics of R&D contribute to a process of increasing dominance (whereby market leaders increase their lead and monopolists persist as such) or something like what Schumpeter referred to as the process of creative destruction (whereby new firms constantly replace incumbents). There is an interesting parallel between this question and the macroeconomics literature on growth and convergence (do rich countries tend to become even richer or do poor countries tend to catch up?).

From a normative point of view, there are two important questions. First, the antitrust treatment of R&D agreements between firms. Public policy has normally been distrustful of agreements between firms. However, there are reasons to make R&D an exception to this general stance.

The second important normative question refers to the protection of intellectual property (IP). The basic trade-off here is between maximizing allocative efficiency and providing the right incentives for investment in R&D (in other words, the trade-off between static and dynamic efficiency). The development of the internet has created a host of novel IP issues, both related to patent law and to copyright law (should be given a patent for "one-click shopping"? Did violate copyright law, and, more fundamentally, What should the copyright law state?). The economic analysis of these issues will certainly constitute an important part of the economics literature on R&D in the years to come.

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