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Strategic Spillovers and Incentives for Research and Development

  • Dietmar Harhoff

    (University of Mannheim, Department of Economics, D68131 Mannheim, Germany and Zentrum für Europäische Wirtschaftsforschung (ZEW), Mannheim, Germany)

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 endogenously. Weak appropriability conditions in the downstream industry enhance innovation incentives in the supply sector.

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File URL: http://dx.doi.org/10.1287/mnsc.42.6.907
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 42 (1996)
Issue (Month): 6 (June)
Pages: 907-925

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Handle: RePEc:inm:ormnsc:v:42:y:1996:i:6:p:907-925
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