Upstream industrial structure, input price contract and downstream R&D

The relationship of upstream industrial structure, input price contract and incentives for cost-reducing R&D by downstream firms in a two-tier market structure is analyzed. Given floating price contract, by increasing the demand for an input, downstream R&D allows the upstream Finn to raise its input price. This lowers the benefit of R&D to a downstream firm but raises its rivals' costs. As a result, floating price contract promotes R&D level for downstream oligopoly and competition. For downstream monopoly, that floating contract is better than fixed contract must satisfy the condition, which the number of upstream is greater than four. When upstream monopoly, fixed-price contract promotes R&D level.