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Designing input prices to motivate process innovation

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  • Chen, Yongmin
  • Sappington, David E.M.

Abstract

We examine the optimal design of regulated input prices, accounting explicitly for their impact on incentives for process innovation. Optimal input prices are shown to vary both with the prevailing vertical industry structure and with the nature of downstream competition. The optimal input pricing rule tends to provide stronger incentives for innovation under vertical integration than under vertical separation in the presence of downstream Cournot competition. The stronger incentives tend to be implemented under vertical separation in the presence of downstream Bertrand competition.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 3 (May)
Pages: 390-402

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Handle: RePEc:eee:indorg:v:27:y:2009:i:3:p:390-402

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Innovation Regulation Input prices Vertical integration;

References

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  1. Stefan Buehler & Armin Schmutzler, 2004. "Intimidating Competitors – Endogenous Vertical Integration and Downstream Investment in Successive Oligopoly," SOI - Working Papers 0409, Socioeconomic Institute - University of Zurich, revised Jul 2005.
  2. Cambini, Carlo & Valletti, Tommaso, 2003. "Investments and Network Competition," CEPR Discussion Papers 3829, C.E.P.R. Discussion Papers.
  3. Yongmin Chen, 2000. "On Vertical Mergers and Their Competitive Effects," Econometric Society World Congress 2000 Contributed Papers 0383, Econometric Society.
  4. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Patrick Greenlee, 2005. "Endogenous Formation Of Competitive Research Sharing Joint Ventures," Journal of Industrial Economics, Wiley Blackwell, vol. 53(3), pages 355-391, 09.
  6. Stefan Buehler & Armin Schmutzler & Men-Andri Benz, 2002. "Infrastructure Quality in Deregulated Industries: Is there an Underinvestment Problem?," SOI - Working Papers 0209, Socioeconomic Institute - University of Zurich.
  7. Choi, J.P. & Yi, S.S., 1997. "Vertical Foreclosure with the Choice of Input Specifications," Discussion Paper 1997-16, Tilburg University, Center for Economic Research.
  8. D. Lee Heavner, 2004. "Vertical Enclosure: Vertical Integration and the Reluctance to Purchase from a Competitor," Journal of Industrial Economics, Wiley Blackwell, vol. 52(2), pages 179-199, 06.
  9. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  10. Richard J. Gilbert & Michael H. Riordan, 2007. "PRODUCT IMPROVEMENT AND TECHNOLOGICAL TYING IN A WINNER-TAKE-ALL MARKET -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 55(1), pages 113-139, 03.
  11. Sappington, David E.M., 2006. "On the design of input prices: Can TELRIC prices ever be optimal?," Information Economics and Policy, Elsevier, vol. 18(2), pages 197-215, June.
  12. Brocas, Isabelle, 2003. "Vertical integration and incentives to innovate," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 457-488, April.
  13. David Sappington, 2006. "On the Merits of Vertical Divestiture," Review of Industrial Organization, Springer, vol. 29(3), pages 171-191, November.
  14. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
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Cited by:
  1. Avenali, Alessandro & Matteucci, Giorgio & Reverberi, Pierfrancesco, 2010. "Dynamic access pricing and investment in alternative infrastructures," International Journal of Industrial Organization, Elsevier, vol. 28(2), pages 167-175, March.
  2. Alessandro Avenali & Giorgio Matteucci & Pierfrancesco Reverberi, 2010. "How does vertical industry structure affect investment in infrastructure quality?," DIS Technical Reports 2010-08, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".

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