Introduction

One of the persistent strands in Louis Phlips' contributions to industrial economics is that competition policy can and should be informed by economic analysis (for example, Phlips, 1993, 1995, 1996). In this chapter I make an effort in that direction.

There is a large literature that examines the impact of R&D cooperation on technological performance. In Martin (1996), I show that R&D cooperation makes it more likely that tacit collusion will be an equilibrium strategy. Here I investigate the impact of product market competition policy on technological performance.

In a market system, firms invest in new technology and new product development because of the profit they expect to earn after discovery and development. More precisely, a firm's incentive to invest in R&D depends on the difference between the profit it earns before innovation and the profit it expects to earn after innovation.

Competition or anti-trust policy exposes firms to the possibility of fines and injunctions if they engage in prohibited conduct. But the proscriptions of competition law will not be binding constraints unless the probability that violations will be detected is sufficiently high and the penalties that follow conviction are sufficiently great. In practice, neither of these conditions is likely to be met, with the result that the effect of competition policy will be to deter and ameliorate the condemned behaviour, not to completely prevent it.