Innovation, rent extraction, and integration in systems markets

We consider innovation incentives in markets where final goods are systems comprising two strictly complementary components, one of which is monopoliz ed. We focus on the case in which the complementary component is competitiv ely supplied and innovation is important. We explore ways in which the mono poly may have incentives to extract efficiency rents in the competitive sec tor, thus weakening or destroying incentives for independent innovation. We discuss how these problems are affected if the monopolist integrates into supply of the complement.