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Designing input prices to motivate process innovation

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Listed author(s):
  • 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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File URL: http://www.sciencedirect.com/science/article/pii/S0167-7187(08)00118-5
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

Keywords: Innovation Regulation Input prices Vertical integration;

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  1. 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.
  2. Tommaso M. Valletti & Carlo Cambini, 2005. "Investments and Network Competition," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 446-468, Summer.
  3. 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.
  4. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  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. Buehler, Stefan & Schmutzler, Armin & Benz, Men-Andri, 2004. "Infrastructure quality in deregulated industries: is there an underinvestment problem?," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 253-267, February.
  7. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347-347.
  8. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
  9. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Jay Pil Choi & Sang-Seung Yi, 2000. "Vertical Foreclosure with the Choice of Input Specifications," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 717-743, Winter.
  11. 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.
  12. David Sappington, 2006. "On the Merits of Vertical Divestiture," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(3), pages 171-191, November.
  13. Brocas, Isabelle, 2003. "Vertical integration and incentives to innovate," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 457-488, April.
  14. 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.
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Cited by:

  1. 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".
  2. Avenali, Alessandro & Matteucci, Giorgio & Reverberi, Pierfrancesco, 2014. "Broadband investment and welfare under functional and ownership separation," Information Economics and Policy, Elsevier, vol. 28(C), pages 70-82.
  3. 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.

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