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Input price discrimination can encourage downstream investment and increase welfare

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  • Lestage, Romain
  • Li, Youping

Abstract

This paper investigates the implications of input price discrimination when an upstream monopolist commits to prices before downstream firms make R&D investment and output decisions. We find that input price discrimination can stimulate downstream R&D investment and shift production efficiently relative to uniform pricing. Specifically, input price discrimination impedes investment when the investing firm is a technological leader, fosters investment when it is a laggard, and may improve welfare when investment allows the laggard to overtake the leader. An important policy implication of our results is that antitrust regulation that allows input price discrimination may contribute to technological catch-up.

Suggested Citation

  • Lestage, Romain & Li, Youping, 2022. "Input price discrimination can encourage downstream investment and increase welfare," Economics Letters, Elsevier, vol. 217(C).
    • Handle: RePEc:eee:ecolet:v:217:y:2022:i:c:s0165176522002373
    DOI: 10.1016/j.econlet.2022.110697
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    References listed on IDEAS

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    Cited by:

    1. Lømo, Teis Lunde, 2023. "Input price discrimination with two-part tariffs and quantity competition," Economics Letters, Elsevier, vol. 225(C).

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    More about this item

    Keywords

    Commitment; Distance to frontier; Price discrimination; R&D investment; Technological catch-up;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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