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Downstream Vertical Foreclosure and Upstream Innovation

Christodoulos Stefanadis
The Journal of Industrial Economics
Vol. 45, No. 4 (Dec., 1997), pp. 445-456
Published by: Wiley
Stable URL: http://www.jstor.org/stable/2950611
Page Count: 12
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Downstream Vertical Foreclosure and Upstream Innovation
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Abstract

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.

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