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Strategic commitments of downstream investment firms

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  • DongJoon Lee
  • Joonghwa Oh

Abstract

This study investigates the strategic commitment of downstream firms' private R&D investments. While an observable investment, as a pre‐production commitment, influences an upstream firm's input price, it affects a rival downstream firm's output. We show that both downstream firms commit to underinvestment (overinvestment) to reduce an input price (compete with a rival firm) in cases of small (large) product substitutability. However, they make their aggressive investments unobservable in the market in cases of medium product substitutability. Furthermore, when both products are sufficiently differentiated, consumer surplus and social welfare are larger when downstream investments are unobservable.

Suggested Citation

  • DongJoon Lee & Joonghwa Oh, 2022. "Strategic commitments of downstream investment firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 2098-2107, September.
    • Handle: RePEc:wly:mgtdec:v:43:y:2022:i:6:p:2098-2107
    DOI: 10.1002/mde.3511
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    References listed on IDEAS

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