Downstream R&D, raising rivals' costs, and input price contracts
Document Type
Journal article
Source Publication
International Journal of Industrial Organization
Publication Date
1-1-2003
Volume
21
Issue
1
First Page
79
Last Page
96
Abstract
We analyze the incentives for cost-reducing R&D by downstream firms in a two-tier market structure. By increasing the demand for an input, downstream R&D allows the upstream firm to raise its input price. This lowers the benefit of R&D to a downstream firm but raises its rivals' costs. As a result, a downstream oligopolist may invest more in R&D than a downstream monopolist, a phenomenon that is absent in a purely horizontal R&D setting. Fixed-price agreements (where the input price remains unchanged following downstream R&D) promote innovation by eliminating the opportunistic behavior of the input supplier and are welfare enhancing.
DOI
10.1016/S0167-7187(02)00010-3
Print ISSN
01677187
Publisher Statement
Copyright © 2003 Elsevier Science B.V.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Banerjee, S., & Lin, P. (2003). Downstream R&D, raising rivals' costs, and input price contracts. International Journal of Industrial Organization, 21(1), 79-96. doi: 10.1016/S0167-7187(02)00010-3