Designing input prices to motivate process innovation.(Report) Chen, Yongmin; Sappington, David E.M.

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Chen, Yongmin ; Sappington, David E.M.
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International Journal of Industrial Organization
Commodity & service prices; Company pricing policy; Business, international
To link to full-text access for this article, visit this link: Byline: Yongmin Chen (a), David E.M. Sappington (b) Keywords: Innovation; Regulation; Input prices; Vertical integration Abstract: We examine the optimal design of regulated input prices, accounting explicitly for their impact on incentives for process innovation. Optimal input prices are shown to vary both with the prevailing vertical industry structure and with the nature of downstream competition. The optimal input pricing rule tends to provide stronger incentives for innovation under vertical integration than under vertical separation in the presence of downstream Cournot competition. The stronger incentives tend to be implemented under vertical separation in the presence of downstream Bertrand competition. Author Affiliation: (a) Department of Economics, University of Colorado, Boulder, CO 80309, United States (b) Department of Economics, University of Florida, PO Box 117140, Gainesville, FL 32611, United States Article History: Received 20 December 2007; Revised 29 October 2008; Accepted 30 October 2008 Article Note: (footnote) [star] We thank the co-editor, two anonymous referees, and Anil Arya for very helpful comments and suggestions. We thank Mircea Marcu for excellent research assistance.
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