Premium
Downstream Vertical Foreclosure and Upstream Innovation[Note 1. I thank William Baumol, Nicholas Economides, Pino Lopomo, Preston ...]
Author(s) -
Stefanadis Christodoulos
Publication year - 1997
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/1467-6451.00058
Subject(s) - downstream (manufacturing) , upstream (networking) , foreclosure , upstream and downstream (dna) , business , context (archaeology) , industrial organization , competition (biology) , production (economics) , supply chain , economics , microeconomics , marketing , computer science , ecology , telecommunications , finance , biology , paleontology
I examine a link between downstream foreclosure and upstream innovation. The crucial ingredient of the model is the presence of dynamic economies of scale upstream in the form of competition in R&D. The reason an upstream supplier has a captive buyer is to force rival suppliers to incur the disadvantages of low‐scale production and discourage them from innovating. The downstream buyer is offered favorable terms and is “convinced” to sign an exclusive supply contract and accept captivity. In this context, downstream foreclosure may reduce consumer welfare.