Downstream R&D, raising rivals' costs, and input price contracts

Samiran BANERJEE, Ping LIN

Research output: Journal PublicationsJournal Article (refereed)

46 Citations (Scopus)

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 languageEnglish
Pages (from-to)79-96
Number of pages18
JournalInternational Journal of Industrial Organization
Volume21
Issue number1
DOIs
Publication statusPublished - 1 Jan 2003

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