R&D Incentives in Vertically Related Markets

Posted by D. Daniel Sokol

Ahmad Reza Saboori Memar (University of Giessen and University of California San Diego) & Georg Gotz (University of Giessen) discuss R&D Incentives in Vertically Related Markets

ABSTRACT: This paper focuses on incentives to invest in research and development (R&D) in vertically related markets. In a bilateral duopoly setup, we consider how process R&D incentives of the firms in both upstream and downstream market depend on the intensity of simultaneous interbrand and intrabrand competition. Among the results: both interbrand and intrabrand competition have twofold effects on R&D incentives. Existence of a vertically related market with imperfect competition lowers both the incentives to invest in process R&D and the competitive advantage through the R&D investment. We will show how the impact of a firm’s R&D investments in either market on consumer surplus as well as on the profits of all firms in both markets depends on exogenous parameters.