[This paper examines third-degree price discrimination by an intermediate good monopolist selling to downstream firms that differ in their abilities to integrate backward into supply of the input. It is shown that discrimination may lead to all buyers facing higher prices, and conditions under which discrimination reduces welfare by lowering total output are presented. It is shown that discrimination may raise welfare in some cases by preventing socially inefficient backward integration.]

We study the rivalry between two firms to develop an innovation in a dynamic setting that allows for postdevelopment dissemination of the innovation, such as licensing or imitation. This dissemination may cause the noninnovating firm to benefit from the discovery. When this occurs, conventional results in the economics of R & D no longer need apply. We find that industry leaders will tend to develop minor innovations, but will develop major innovations only if imitation is difficult.

The author examines third-degree price discrimination by an upstream monopolist in an intermediate good market. Discrimination is motivated by the fact that downstream firms differ in their abilities to integrate backward into supply of the input. The author shows that under reasonable specifications of equilibrium, price discrimination leads to all buyers facing higher input prices. In other cases, discrimination raises some prices and lowers others. The author derives conditions under which discrimination lowers welfare by reducing total output and shows that in some markets discrimination will raise welfare by preventing socially inefficient backward integration.

The authors study the rivalry between two firms to develop an innovation in a dynamic setting that allows for post-development dissemination of the innovation, such as licensing or imitation. This dissemination may cause the noninnovating firm to benefit from the discovery. When this occurs, conventional results in the economics of R&D no longer need apply They find that industry leaders will tend to develop minor innovations, but will develop major innovations only if imitation is difficult.