Innovation, Market Structure and the Holdup Problem: Investment Incentives and Coordination
39 Pages Posted: 23 Oct 2001
I analyze the innovation incentives under monopoly and duopoly provision of horizontally differentiated products purchased via bilateral negotiations, integrating the market structure and innovation literature with the holdup literature. I show that competition can improve local incentives for non-contractible investment. Because innovation levels are generally strategic substitutes, however, there can be multiple duopoly equilibria. In some circumstances, monopoly can provide a coordination device that can lead to greater expected welfare despite inferior local innovation incentives. The conditions for this to be the case, however, are quite restrictive.
Keywords: Holdup, Market Structure, Innovation Incentives
JEL Classification: D21, L10
Suggested Citation: Suggested Citation