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Monopsony Power and Upstream Innovation

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  • Álvaro Parra
  • Guillermo Marshall

Abstract

How does a monopsonist incentivize its supplier to innovate? By decreasing the short‐run profit of the supplier, the monopsonist can increase the supplier's incentive to invest in R&D by lessening the supplier's Arrow's replacement effect. The monopsonist engages in this practice despite a distortion in its trade volume with the supplier that causes inefficiency. We discuss implications for the boundaries of the firm.

Suggested Citation

  • Álvaro Parra & Guillermo Marshall, 2024. "Monopsony Power and Upstream Innovation," Journal of Industrial Economics, Wiley Blackwell, vol. 72(2), pages 1005-1020, June.
    • Handle: RePEc:bla:jindec:v:72:y:2024:i:2:p:1005-1020
    DOI: 10.1111/joie.12379
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    References listed on IDEAS

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