Reexamining the effect of the most-favored-nation provision in input prices on R and D incentives

Jeong Y. Kim, Jae Hyon Nahm

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

We examine the effect of the most-favored-nation provision in input prices on downstream firms' R and D incentives. Contrary to the previous literature, we show that the effect depends on the extent of substitutability between downstream firms if they compete in two-part tariffs. When a downstream firm lowers its marginal cost, it entails two conflicting effects on the upstream firm's pricing for inputs, the standard elasticity effect of penalizing the low-cost firm and the market share effect of rewarding it. If substitutability between downstream products is high enough, the latter dominates the former, and thus downstream firms will choose a higher marginal cost technology under the MFN provision.

Original languageEnglish
Pages (from-to)201-217
Number of pages17
JournalInternational Journal of Industrial Organization
Volume25
Issue number1
DOIs
Publication statusPublished - 2007 Feb 1
Externally publishedYes

Fingerprint

Costs
Elasticity
Input prices
Incentives
Marginal cost
Substitutability
Market share
Pricing
Two-part tariff

Keywords

  • Access charge
  • MFN provision
  • Price discrimination
  • Two-part tariff

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Reexamining the effect of the most-favored-nation provision in input prices on R and D incentives. / Kim, Jeong Y.; Nahm, Jae Hyon.

In: International Journal of Industrial Organization, Vol. 25, No. 1, 01.02.2007, p. 201-217.

Research output: Contribution to journalArticle

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