TY - JOUR
T1 - Downstream R&D, raising rivals' costs, and input price contracts
AU - BANERJEE, Samiran
AU - LIN, Ping
PY - 2003/1/1
Y1 - 2003/1/1
N2 - 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.
AB - 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.
UR - http://commons.ln.edu.hk/sw_master/2076
U2 - 10.1016/S0167-7187(02)00010-3
DO - 10.1016/S0167-7187(02)00010-3
M3 - Journal Article (refereed)
SN - 0167-7187
VL - 21
SP - 79
EP - 96
JO - International Journal of Industrial Organization
JF - International Journal of Industrial Organization
IS - 1
ER -