This paper considers a free entry upstream industry to analyze the impact of a change of downstream market structure on the input price and on the downstream firms R&D incentives. With a free entry upstream industry, a more competitive downstream market increases the derived demand for inputs, but the input price will, instead of increasing, decrease. Furthermore, an especially noteworthy result of this paper, which is in sharp contrast to the implications of the existing literature, is that a more competitive downstream market causes each downstream firm's output to decrease, but may induce each downstream firm to increase R&D.
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