Distance to frontier, input price discrimination, and downstream R&D

Whether input suppliers charge customized (discriminatory) or industry-wide (uniform) prices affects downstream manufacturers' incentives to innovate. This paper investigates the implications of input price discrimination when an upstream monopolist commits to prices before downstream firms make R&D investment and output decisions. We find that input price discrimination can stimulate downstream R&D investment and shift production efficiently relative to uniform pricing. Specifically, input price discrimination impedes investment when the investing firm is a technological leader, fosters investment when it is a laggard, and may improve welfare when investment allows the laggard to overtake the leader. An important policy implication of our results is that antitrust regulation that allows input price discrimination may contribute to technological catch-up