Centre for Public Policy Studies 5 7 Lingnan University Hong Kong No . 111 ( / 01 ) CPPS DOWNSTREAM R & D , RAISING RIVALS ’ COSTS , AND INPUT PRICE CONTRACT
نویسندگان
چکیده
We analyze the incentives for cost-reducing R&D by downstream firms in a two-tier market structure. Downstream R&D increases the demand for an input, thereby allowing the upstream firm to raise the input price. While it lowers the benefit of R&D to a downstream firm, such a price adjustment by the input supplier leads to a higher production cost for all rival firms. Due to this “raising rivals’ cost” effect, a downstream oligopolist may invest more in R&D than does a downstream monopolist, a phenomenon that does not occur in a purely horizontal setting. Fixed-price agreements under which the input price remains unchanged in response to downstream R&D promote innovation by eliminating the opportunistic behavior of the input supplier. In general, the incentive for downstream R&D is positively related to input pricing rigidity
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