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Buying from a Competitor: A Model of Knowledge Spillover and Innovation

Author

Listed:
  • Dominique Olié Lauga

    (University of Cambridge, Cambridge CB2 1TN, United Kingdom)

  • Matthew Selove

    (Chapman University, Orange, California 92866)

  • Mohammad Zia

    (Chapman University, Orange, California 92866)

Abstract

Many firms buy a production input from a competitor. However, managers often worry that this supply relationship may give their competitor valuable knowledge about new product innovations. We develop a two-period model in which a firm can buy an input from a competitor or a third party in each period. In order to innovate, the firm must invest in improving the input, which results in its supplier learning to produce a higher quality input. We show that buying from the competitor: (i) increases short-term profits by softening price competition and (ii) may reduce long-term profits by preventing investment in innovation. Our results imply that the classic holdup problem, which leads to underinvestment in innovation, becomes more severe when a firm buys from its competitor who benefits from knowledge spillover.

Suggested Citation

  • Dominique Olié Lauga & Matthew Selove & Mohammad Zia, 2025. "Buying from a Competitor: A Model of Knowledge Spillover and Innovation," Marketing Science, INFORMS, vol. 44(4), pages 760-776, July.
    • Handle: RePEc:inm:ormksc:v:44:y:2025:i:4:p:760-776
    DOI: 10.1287/mksc.2023.0148
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