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Downstream Cross‐Holdings and Upstream R&D

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  • Qing Hu
  • Aika Monden
  • Tomomichi Mizuno

Abstract

Cross‐holdings affect firms’ behavior in other vertically related markets. We consider a vertical market with two downstream firms and an upstream firm engaging in cost‐reducing R&D. Since downstream cross‐holdings weaken downstream competition, the upstream firm also decreases its investment. Hence, we find that as the degree of downstream cross‐holdings increases, input price increases and investment level decreases. Although cross‐holdings have this negative effect on downstream firms’ profits, they increase the downstream firms’ profits if the investment technology is inefficient. Finally, we show that with inefficient upstream investment, total surplus increases with cross‐holdings, while consumer surplus always decreases with cross‐holdings.

Suggested Citation

  • Qing Hu & Aika Monden & Tomomichi Mizuno, 2022. "Downstream Cross‐Holdings and Upstream R&D," Journal of Industrial Economics, Wiley Blackwell, vol. 70(3), pages 775-789, September.
    • Handle: RePEc:bla:jindec:v:70:y:2022:i:3:p:775-789
    DOI: 10.1111/joie.12257
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    References listed on IDEAS

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