Product innovation and two-part tariff vertical contracts

This research analyses the effects of R&D investment on product innovation using a game-theoretic, two-tier model. An upstream monopolist and downstream duopolistic firms negotiate the terms of a non-linear, two-part tariff vertical contract. The work aims to combine two distinct strands of the industrial organisation literature. The first is the study of endogenous choices regarding investment in R&D for product innovation within a game-theoretic context. The second is the well-established analysis of vertically related markets, with specific attention to a two-tier industry where an upstream monopolist trades with two downstream duopolistic firms using a non-linear, two-part tariff contract. The article offers theoretical results on the decision of whether to invest in product innovation in a two-tier market and compares these outcomes with those of a one-tier industry, showing some counterintuitive results.