Article ID: | iaor19971749 |
Country: | United States |
Volume: | 42 |
Issue: | 6 |
Start Page Number: | 907 |
End Page Number: | 925 |
Publication Date: | Jun 1996 |
Journal: | Management Science |
Authors: | Harhoff Dietmar |
Keywords: | research, information |
This paper develops a model in which a monopolist supplier can contribute to downstream product improvements by creating knowledge spillovers which downstream firms use as a substitute for their own R&D efforts. Although a market for R&D information does not exist, the supplier may appropriate an indirect return on R&D for two reasons. Sufficiently high levels of spillover information lead to greater downstream product quality, and spillover information reduces the equilibrium sunk cost of R&D for downstream firms and thus facilitates entry. Both effects cause an expansion of downstream output and enhance the demand for the supplier’s intermediate good. Given sufficiently strong incentives for supplier R&D, the locus of R&D shifts partially from the downstream to the upstream industry. R&D expenditures, technological opportunities, and downstream industry structure are determined endogeneously. Weak appropriability conditions in the downstream industry enhance innovation incentives in the supply sector.