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The answers on this page are provided by Ed Egan, unless otherwise noted. They are not necessarily complete.

'''a.) What factors led U.S. firms to integrate into R&D in the late 19th/early 20th centuries and how if at all did firms exploit intrafirm and external sources of technology during the 1900-1940 period?'''

Human capital was one external source of technology following this period, as the independent inventor declined. The infrastructure developments had assisted in communication of ideas and labor mobility and several clusters of innovative activity developed. Cleveland may have been an early example of Silicon Valley, and the Mid-Atlantic region was particularly associated with innovative firms (Lamoreaux and Sokoloff). However, pharmaceutical firms, in particular, were located close to universities and apparently actively engaged in funding research and catching spillovers.

'''b.) What factors explain the asserted "externalization" of corporate R&D in the 1980s and 1990s? How do these factors operate across different industries? '''

Two industry of particular note where ICT (information and communications technology) and Biotechnology. In the former case, new firms rose to display incumbents, as well as filling vertical specialization roles, whereas in the later case, the new entrants did not for the most part (Chiron and Genentech being exceptions) manage to displace incumbent pharmaceutical firms. They did suceed in vertically specializing in many of the key positions in the value chain though, which suggests that barriers to entry have been and are being reduced. Another important difference is in patent policy, which has grown and strengthened in both areas. Software became patentable, as did electronically conducted business methods, to support the ICT sector, whereas life forms and other bio-inventions became patentable in biotech. University technology transfer became dominated by biotech, where the licensing of inventions was straight forward and lucrative.

'''c.) What indicators support or undermine the argument that U.S. firms have indeed "outsourced" their R&D and other innovation-related activities?'''

I believe that there is strong evidence that policy materially drives innovation, with anti-trust policy, patent policy, and other R&D policy of foremost importance. I would anticipate that anti-trust policy will not materially change, and that in fact the interpretation of policy in terms of economic efficiency will become ever more sophisticated, favouring innovation enhancing strategies. Patent policy is unlikely to change. The dominant change will come through other R&D policy, particularly the spending on R&D by the federal government. With a period of prolonged recession likely, spending on R&D by government will rise relative to spending on R&D by private firms, and capture the spillovers of this spending, perhaps through increased alliances with universities and government labs, perhaps through private research conducted with federal investment, will become increasingly more important. Obama's campaign included a promise of a $10b green technology investment fund, to be operated along the principals of venture capital. This policy would not only fund research, but would do so in the most effective (to date) method of forcing commercialization. Firms will respond by spinning out green ventures, and by buying up promising green companies. This will be particularly prevalent in the oil industry, as both the supply of oil dwinddles and as oil dependence (because of foreign policy and environmental policy) becomes ever less attractive.

The answer to the last part should have included a discussion of ICT and biotech. Biotech seems likely to continue to growth at an increasing rate. With the barriers to entry to the industry reduced, we should also see a number of new entrant suceeding in becoming incumbents. University output of biotech invention shows no sign of slowing in the short term to medium term, and universities have the cospecialized assets for research, which will only grow in importance. In ICT, it is possible that the anti-commons effect will start to become material. In this sector, open source was born and continues to grow. Furthermore, as closed source technology becomes ever more dependent on other closed source technology, and the tangled web of agreements needed for development increases and is ever more widely held (causing hold-up problems as in Ziedonis (2004)), we might expect open source to become ever more attractive, and for ICT firms to specialize further - that is we will continue to see a increased seperation of hardware and software developement, and even within software, development on top of open source platforms will increase.

Mowery, D.C. (2009), "Plus ca change: Industrial R&D in the Third Industrial Revolution", forthcoming, Industrial and Corporate Change.

Whether the innovation is cheap or not is not first order germane. The important question is the appropriability regime. I will assume that the cheap innovation (making the phone red) is appropriable (i.e. there are no property rights associated with the colour red), and that the battery life innovation is patentable and that strong (perfect) IPR protection exists.

Given that the battery innovation has perfect property right protection around it (for 20 years) by assumption, we expect the that firm will have a monopoly on it. Thus, if there is no effect between the markets, Bertrand competition will continue for the White phones which will be priced at marginal cost and earn their firms zero profits, and the battery life phones will be monopoly priced and earn monopoly profits. If there is an effect between the markets, that is because of a taste for variety a change in the Battery phone's price will have an effect on not only the demand for Battery phones but also for White phones, then we have a Dixit-Stiglitz (1977) type model, except that we do not have a free entry assumption. With free entry firms would earn zero profits, but with costly entry (i.e. the cost of coming up with a comparable innovation to the Battery innovation), the Battery firm will earn positive profits. However, because of the demand effect, the battery firm will not earn monopoly profits, but something less. With free entry the number of firms will increase but remain finite in this model - firms enter until the customer's taste for variety is satiated. Likewise with costly entry but excess taste for variety we could expect more entry and more positive profits (to cover the cost of entry) until satiation.

Shaked and Sutton (1982) provide an explanation for an observation of a duopolist, in conjunction with both positive profits and zero entry costs. In their model there is price competition, but they provide grounds for an objection to the investigation. In this model the consumers taste for product variation allows two different quality entrants to enter the market, compete on prices, and earn positive profits. The entry of a third firm (if the parameters are as described in their model) would reduce profits to zero for all firms, and reduce welfare - as customers would then only have one choice of product when they have a taste for variety. Thus the grounds would have to that the firms are producing different qualities, and that the higher quality firm is making the greater profit - this would be entire consistent with the model. For different parameters more than two firms could be in the market even and even with a free entry condition could be earning positive profits - in this case the profits should still be quality ordered. Profits here do not indicate anticompetitive behaviour or barriers to entry - they indicate vertical differentiation. In fact zero profits would indicate too much competition, and too little provision of variety.

#'''[[Dixit Stiglitz (1977) - Monopolistic Competition And Optimum Product Diversity |Dixit, A. and J. Stiglitz (1977)]]''', "Monopolistic competition and optimum product diversity", American Economic Review 67, 297-308. [http://www.edegan.com/pdfs/Dixit%20Stiglitz%20(1977)%20-%20Monopolistic%20competition%20and%20optimum%20product%20diversity.pdf pdf] [http://www.edegan.com/repository/Dixit%20Stiglitz%20(1977)%20-%20Class%20Slides.pdf (Class Slides)]

#'''[[Shaked Sutton (1982) - Relaxing Price Competition Through Product Differentiation |Shaked, A. and J. Sutton (1982)]]''', "Relaxing price competition through product differentiation", Review of Economic Studies 49, 3-13. [http://www.edegan.com/pdfs/Shaked%20Sutton%20(1982)%20-%20Relaxing%20price%20competition%20through%20product%20differentiation.pdf pdf]

Bottlers have to make relational specific investments under incomplete contracts, which results in a classic hold-up problem (Williamson 1971). Contracts are inherently incomplete because they were granted perpetually (to which I will return) and market conditions, over the lifetime of the assets needed for effective production and distribution, are impossible to forecast. The cost of writing a contingent claims (i.e. Arrow-Debreu) contract would be prohibitively high. Relational specific investments were also inherently necessary: The bottler needed specialized equipment to manufacture the product that would have little value outside of the relationship, and would be investing in brand-specific capital that was only applicable to the CM. Likewise, the CM was dependent on the bottler for production and distribution. Brand capital is long lived, perhaps never ending, and specific plant investments might have (say) 20 year depreciation periods.