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Downstream new product development and upstream process innovation

Author

Listed:
  • Akio Kawasaki

    (Faculty of Economics, Oita University)

  • Tomomichi Mizuno

    (Graduate School of Economics, Kobe University)

  • Kazuhiro Takauchi

    (Faculty of Business and Commerce, Kansai University)

Abstract

It is well known that when a rival introduces a new product, a firm's response is affected by conflicting factors. For example, a certain factor stimulates firms to introduce their new products in a quick and retaliatory manner if their rivals introduce new products. Based on this fact, we build a simple vertical relation model: two downstream firms decide whether to introduce a horizontally differentiated new product, whereas a single upstream supplier invests in cost-reducing research and development (R&D). We show that the equilibrium of downstream innovation depends on upstream efficiency. If upstream R&D efficiency is high, downstream innovation is a strategic complement; this corresponds to the scenario in which downstream firms act in a retaliatory manner against their rivals introducing new products. Conversely, if upstream efficiency is low, downstream innovation is a strategic substitute: this implies that downstream firms behave passively when their rivals introduce new products. We also find that upstream R&D efficiency works similarly to the R&D spillover parameter in the d'Aspremont and Jacquemin's (1988) model. When R&D spillover is high (low), the firm's innovation behavior is a strategic complement (substitute). Hence, we offer a new insight into the innovation literature.

Suggested Citation

  • Akio Kawasaki & Tomomichi Mizuno & Kazuhiro Takauchi, 2021. "Downstream new product development and upstream process innovation," Discussion Papers 2118, Graduate School of Economics, Kobe University.
  • Handle: RePEc:koe:wpaper:2118
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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