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R&D incentives and spillovers in a two-industry model

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  • Harhoff, Dietmar

Abstract

This paper develops a two-industry model of R&D. A monopolist supplier sells an intermediate good to an oligopolistic buyer industry where firms compete in quantity and quality-enhancing R&D. The supplier can contribute to downstream product improvements by creating spillover knowledge which downstream firms use as a substitute for their own R&D efforts. Even if a market for R&D information fails to 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 sunk cost of R&D necessary to enter the downstream industry. 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 intensities, technological opportunities, and the industry structure of the downstream industry are determined endogenously. The R&D behavior of supplier and buyer firms is characterized by switching equilibria, thereby providing support for the notion of distinct technological regimes. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 91-06.

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Date of creation: 1991
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Handle: RePEc:zbw:zewdip:9106

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Cited by:
  1. Gamal Atallah, 2002. "Vertical R&D Spillovers, Cooperation, Market Structure, and Innovation," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 11(3), pages 179-209.

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