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Why Powerful Buyers finance Suppliers’ R&D

Werner Bönte () and Lars Wiethaus
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Lars Wiethaus: ESMT Competition Analysis

No sdp08004, Schumpeter Discussion Papers from Universitätsbibliothek Wuppertal, University Library

Abstract: It is a common concern that pricing pressure by powerful buyers discourages suppliers' R&D investments. Employing a simple monopsonist - competitive upstream industry - framework, this paper qualifies this view in two respects. First, the monopsonist has an incentive to subsidize upstream R&D which yields more upstream R&D and higher profits in both industries than the monopsonist's commitment to higher prices. Secondly, in the presence of intra-industry R&D spillovers between upstream firms, the monopsonist has an even stronger incentive to finance upstream R&D. If the monopsonist finances more than fifty percent of suppliers R&D efforts, R&D investments in upstream industry will be higher than in the case of buyer competition.

Keywords: Vertical Relationships; Monopsony; Buyer Power; R&D; Knowledge Spillovers (search for similar items in EconPapers)
JEL-codes: L13 L20 O31 O32 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2008-10
New Economics Papers: this item is included in nep-com, nep-ind, nep-ino, nep-knm, nep-mic and nep-tid
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