Endogenous transport price, R&D spillovers, and trade

Efficient distribution has a considerable influence on the sales volume of firms, and thus affects the firms' research and development (R&D) activities. This paper analyses the relationship between competition in the transport sector and the R&D of firms using the transportation services. We consider a two-region reciprocal market in which firms invest in cost-reducing R&D and use carriers that engage in price competition to supply their products to the foreign market. We show that, corresponding to the degree of R&D spillover, a transport cost (or price) reduction because of an increase in the number of carriers can increase or decrease the firms' R&D investments. This result is consistent with the finding in previous studies that trade liberalisation can hinder R&D. Because inefficient firms lead to high prices in the market, an increase in the number of carriers may reduce consumer surplus. We further discuss the case in which firms have monopsony power in transportation services and show that our main results are robust to the extension.