STRATEGIC OUTSOURCING AND R&D IN A VERTICAL STRUCTURE*

Abstract

It has been argued that a monopolist input supplier may find it profitable to create an outside source for its input if it reduces product price and attracts buyers ( , pp. 673-694). We consider a monopolist input supplier's incentive for outsourcing and R&D. We show that even if outsourcing can attract new buyers, it is not beneficial to the input supplier if either the existing final goods market is not very concentrated or cost reduction through R&D is sufficiently large. We further show that while R&D may be preferable to the input supplier, outsourcing may be socially desirable, and thus may create a conflict of interest between the input supplier and the society for R&D and outsourcing. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd and The University of Manchester.

Endogenous transport price and international R&D rivalry

“…This paper is also related to some studies on R&D activities with vertical structures (Banerjee and Lin, 2003;Manasakis and Petrakis, 2009;Matsushima and Mizuno, 2012;Mukherjee and Pennings, 2011;Mukherjee and Ray, 2007). These studies also have two strands.…”

“…These studies also have two strands. The first strand is on the vertically related market (Banerjee and Lin, 2003;Matsushima and Mizuno, 2012;Mukherjee and Ray, 2007); they consider the process innovation of input suppliers or final-good manufacturers. The second strand is on unionized industry (Manasakis and Petrakis, 2009;Mukherjee and Pennings, 2011); they examine union structures (centralized or decentralized) and firms' R&D activities.…”

Vertical licensing, input pricing, and entry

“…The majority of this literature has done so assuming that the licensor and the licensee(s) operate in the same one-tier market or that the licensor is not active in the market (it is an outsider). Some recent exceptions include the papers of Mukherjee (2003), Arya and Mittendorf (2006), Mukherjee and Ray (2007), Rey and Salant (2012), which, similar to us, have examined licensing within a vertically related market. The latter papers, however, di¤er from ours in three important aspects.…”

Profit-enhancing competitive pressure in vertically related industries

“…2 The literature on second sourcing investigates the effect of market entry on the profits of existing firms (Shepard, 1987;Farrell and Gallini, 1988;Mukherjee and Ray, 2007). 3 The assumption concerning the ex ante production condition is applicable to cases in which the production technologies of the firms are new and premature in the market.…”