Countervailing power and upstream product innovation incentive

We build a three stage dynamic game model to study the upstream product innovation incentive mechanism under the condition of non-cooperation and the existing of countervailing power. The results show that, when there is a single retailer has countervailing power, the existing of countervailing power can promote the upstream to select product innovation, make the market price of the original product increased, equilibrium production declined, and make the equilibrium price of innovative products declined, demand increased. In addition, the consumer utility and social welfare are both decreasing with the countervailing power. Finally, we proved that there is no waterbed effect when the countervailing power increased.