In this section the intermediate firm is assumed to take into account its
influence on the amount of current research and thereby on the probability of
its replacement. In particular, by increasing its demand xt for skilled labor, the
monopolist can raise the wage rate that must also be paid to skilled workers in
research. The effect is to reduce the equilibrium amount of research and
consequently to delay the arrival of the (t + 1)st innovation. The monopolist will
trade this gain off against the higher wages it must pay its own skilled labor