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Strategic Outsourcing And R&D In A Vertical Structure

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  • ARIJIT MUKHERJEE
  • ACHINTYA RAY

Abstract

It has been argued that a monopolist input supplier may find it profitable to create an outside source for its input if it reduces product price and attracts buyers (Farrell and Gallini, Quarterly Journal of Economics, Vol. 103 (1988), pp. 673–694). We consider a monopolist input supplier's incentive for outsourcing and R&D. We show that even if outsourcing can attract new buyers, it is not beneficial to the input supplier if either the existing final goods market is not very concentrated or cost reduction through R&D is sufficiently large. We further show that while R&D may be preferable to the input supplier, outsourcing may be socially desirable, and thus may create a conflict of interest between the input supplier and the society for R&D and outsourcing.

Suggested Citation

  • Arijit Mukherjee & Achintya Ray, 2007. "Strategic Outsourcing And R&D In A Vertical Structure," Manchester School, University of Manchester, vol. 75(3), pages 297-310, June.
    • Handle: RePEc:bla:manchs:v:75:y:2007:i:3:p:297-310
    DOI: 10.1111/j.1467-9957.2007.01018.x
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    References listed on IDEAS

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    1. G. Rossini & L. Lambertini, 2003. "Endogeneous outsourcing and vertical integration with process R&D," Working Papers 487, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Versaevel, Bruno & de Villemeur, Étienne, 2003. "Conflict and Cooperation on R&D Markets," IDEI Working Papers 191, Institut d'Économie Industrielle (IDEI), Toulouse.
    3. Dietmar Harhoff, 1998. "Vertical Organization, Technology Flows and R&D Incentives: An Exploratory Analysis," CIG Working Papers FS IV 98-02, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    4. Oliver Hart & Jean Tirole, 1990. "Vertical Integration and Market Foreclosure," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990 Micr), pages 205-286.
    5. L. Lambertini & G. Rossini, 2003. "Vertical Integration and Differentiation in an Oligopoly with Process Innovating R&D," Working Papers 468, Dipartimento Scienze Economiche, Universita' di Bologna.
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    7. Chrysovalantou MILLIOU, 2001. "Vertical Integration and R&D Spillovers: Is There a Need for 'Firewalls'?," Economics Working Papers ECO2001/17, European University Institute.
    8. Harhoff, Dietmar, 1991. "R&D incentives and spillovers in a two-industry model," ZEW Discussion Papers 91-06, ZEW - Leibniz Centre for European Economic Research.
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    Cited by:

    1. Bakaouka, Elpiniki & Milliou, Chrysovalantou, 2018. "Vertical licensing, input pricing, and entry," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 66-96.
    2. Takauchi, Kazuhiro, 2015. "Endogenous transport price and international R&D rivalry," Economic Modelling, Elsevier, vol. 46(C), pages 36-43.
    3. Matsushima, Noriaki & Mizuno, Tomomichi, 2012. "Profit-enhancing competitive pressure in vertically related industries," Journal of the Japanese and International Economies, Elsevier, vol. 26(1), pages 142-152.
    4. Tarun Kabiraj & Uday Bhanu Sinha, 2011. "Strategic Outsourcing with Technology Transfer," Working papers 203, Centre for Development Economics, Delhi School of Economics.
    5. A. Mukherjee & U. Broll & S. Mukherjee, 2008. "Unionized labor market and licensing by a monopolist," Journal of Economics, Springer, vol. 93(1), pages 59-79, February.
    6. Tai‐Liang Chen & Zuyi Huang, 2020. "Technology licensing or cost‐reducing outsourcing? Game theoretical analysis on consumers' home bias effects and firms' optimal strategies," Bulletin of Economic Research, Wiley Blackwell, vol. 72(4), pages 417-433, October.
    7. Mukherjee, Soma & Broll, Udo & Mukherjee, Arijit, 2007. "Licensing by a monopolist and unionized labor market," Dresden Discussion Paper Series in Economics 09/07, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    8. Hamid Beladi & Sugata Marjit & Lei Yang, 2012. "Outsourcing: Volume and Composition of R&D," Review of International Economics, Wiley Blackwell, vol. 20(4), pages 828-840, September.

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