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Why Powerful Buyers finance Suppliers’ R&D

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Author Info

  • Werner Bönte

    (Schumpeter School of Business and Economics, University of Wuppertal)

  • Lars Wiethaus

    (ESMT Competition Analysis)

Abstract

It is a common concern that pricing pressure by powerful buyers discourages suppliers' R&D investments. Employing a simple monopsonist - competitive upstream industry - framework, this paper qualifies this view in two respects. First, the monopsonist has an incentive to subsidize upstream R&D which yields more upstream R&D and higher profits in both industries than the monopsonist's commitment to higher prices. Secondly, in the presence of intra-industry R&D spillovers between upstream firms, the monopsonist has an even stronger incentive to finance upstream R&D. If the monopsonist finances more than fifty percent of suppliers R&D efforts, R&D investments in upstream industry will be higher than in the case of buyer competition.

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Bibliographic Info

Paper provided by Universitätsbibliothek Wuppertal, University Library in its series Schumpeter Discussion Papers with number sdp08004.

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Length: 21 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:bwu:schdps:sdp08004

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Web page: http://elpub.bib.uni-wuppertal.de

Related research

Keywords: Vertical Relationships; Monopsony; Buyer Power; R&D; Knowledge Spillovers;

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