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Solving a hold-up problem may harm all firms: Downstream R&D and transport-price contracts

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  • Takauchi, Kazuhiro
  • Mizuno, Tomomichi

Abstract

This study considers transport-price contracts in a two-country duopoly model with firm-specific carriers. It is well-known that when an upstream firm fails to commit to keeping its transaction (or transport) price after a downstream firm's R&D investment, it causes the hold-up problem and diminishes the incentive for R&D investment. While previous literature emphasizes that the commitment to keep the transaction price is needed to overcome the hold-up problem, we show that this commitment may harm all firms. We also discuss the robustness of our results in cases with R&D spillovers, product differentiation, and non-linear production costs.

Suggested Citation

  • Takauchi, Kazuhiro & Mizuno, Tomomichi, 2019. "Solving a hold-up problem may harm all firms: Downstream R&D and transport-price contracts," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 29-49.
  • Handle: RePEc:eee:reveco:v:59:y:2019:i:c:p:29-49
    DOI: 10.1016/j.iref.2018.08.002
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    Cited by:

    1. Kazuhiro Takauchi & Tomomichi Mizuno, 2019. "Consumer-benefiting transport cost: The role of product innovation in a vertical structure," Discussion Papers 1911, Graduate School of Economics, Kobe University.

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    More about this item

    Keywords

    Transport-price contracts; Downstream R&D; Firm-specific Carrier; Hold-up problem;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General

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