Abstract
We analyze the incentives for cost-reducing RandD by downstream firms in a two-tier market structure. By increasing the demand for an input, downstream RandD allows the upstream firm to raise its input price. This lowers the benefit of RandD to a downstream firm but raises its rivals' costs. As a result, a downstream oligopolist may invest more in RandD than a downstream monopolist, a phenomenon that is absent in a purely horizontal RandD setting. Fixed-price agreements (where the input price remains unchanged following downstream RandD) promote innovation by eliminating the opportunistic behavior of the input supplier and are welfare enhancing.
Original language | English |
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Pages (from-to) | 79-96 |
Number of pages | 18 |
Journal | International Journal of Industrial Organization |
Volume | 21 |
Issue number | 1 |
DOIs | |
Publication status | Published - 1 Jan 2003 |
Funding
sWe thank two anonymous referees for valuable comments and suggestions. We alone are responsible for any errors.