Downstream new product development and upstream process innovation

Akio Kawasaki, Tomomichi Mizuno and Kazuhiro Takauchi
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Akio Kawasaki: Faculty of Economics, Oita University

No 2118, Discussion Papers from Graduate School of Economics, Kobe 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.

Pages: 32 pages
Date: 2021-06
New Economics Papers: this item is included in nep-com, nep-mic and nep-tid
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Related works:
Journal Article: Downstream new product development and upstream process innovation (2023)
Working Paper: Downstream new product development and upstream process innovation (2020)
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