Monopsony Power and Upstream Innovation

Alvaro Parra and Guillermo Marshall

Journal of Industrial Economics, 2024, vol. 72, issue 2, 1005-1020

Abstract: How does a monopsonist incentivize its supplier to innovate? By decreasing the short‐run profit of the supplier, the monopsonist can increase the supplier's incentive to invest in R&D by lessening the supplier's Arrow's replacement effect. The monopsonist engages in this practice despite a distortion in its trade volume with the supplier that causes inefficiency. We discuss implications for the boundaries of the firm.

Date: 2024
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