Strategic spillovers and incentives for research and development

Strategic spillovers and incentives for research and development

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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:
Keywords: research, information
Abstract:

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.

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