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

Author

Listed:
  • Kazuhiro Takauchi

    (Faculty of Business and Commerce, Kansai University)

  • Tomomichi Mizuno

    (Graduate School of Economics, Kobe University)

Abstract

In vertical relations, by raising input price after downstream research and development (R&D) investment, upstream firms can extract the R&D benefit and have an incentive to set higher input price. As downstream firms underinvest for fear of this hold-up by upstream firms, outputs and input-demand shrink, and all firms become worse off. Previous literature emphasizes that a fixed-price contract in which upstream firms first commit themselves to input prices and downstream firms subsequently invest can resolve the hold-up problem and make all firms better off. By contrast, we show that in a vertical relation between firm-specific carriers and exporters, the fixed-price contract of transport price can make all firms worse off because an efficiency improvement in exporters intensifies inter-regional competition. We also discuss the robustness of the result.

Suggested Citation

  • Kazuhiro Takauchi & Tomomichi Mizuno, 2017. "Solving a hold-up problem may harm all firms: downstream R&D and transport-price contracts," Discussion Papers 1707, Graduate School of Economics, Kobe University.
  • Handle: RePEc:koe:wpaper:1707
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    File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2017/1707.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Transport-price contracts; Downstream R&D; Firm-specific carrier; Hold-up problem;

    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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