Competition Policy for High Technology Industries

I present a model of optimal product-market competition policy when industries differ in the potential for quality-improving technological advance. In a two-period, model, a competition authority with limited resources administers a deterrence-based competition policy toward two industries. In one of the industries, an incumbent firm chooses the level of resources to invest in a quality-improving R&D project. In the other industry, product quality is constant. Optimal policy requires the competition authority to administer a tougher competition policy before innovation, all else equal, the greater the potential quality improvement. I derive basic results for the case of one-time innovation, and extend them to the cases of sequential innovation and patent protection that confers limited antitrust immunity.