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 |
|---|---|
| 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.