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

Kazuhiro Takauchi and Tomomichi Mizuno ()

International Review of Economics & Finance, 2019, vol. 59, issue C, 29-49

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.

Keywords: Transport-price contracts; Downstream R&D; Firm-specific Carrier; Hold-up problem (search for similar items in EconPapers)
JEL-codes: L13 F12 O31 R40 (search for similar items in EconPapers)
Date: 2019
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