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

Dominique Olié Lauga (), Matthew Selove () and Mohammad Zia ()
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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

Marketing Science, 2025, vol. 44, issue 4, 760-776

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.

Keywords: game theory; channel relationships; innovations; pricing (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:44:y:2025:i:4:p:760-776

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