Technology investments into a supplier with upstream entry

This study examines the effect of the upstream entry in a supply chain, where one manufacturer (she), facing the entry of one potential supplier, makes technology investments into the incumbent supplier (he) or the entrant supplier. We first find the upstream entry may motivate the manufacturer to make more investments into the incumbent, unless the entrant has a production cost advantage over the incumbent, given a high investment cost. Our work further reveals a ‘triple win’ outcome may be achievable for all players, as not only the manufacturer but surprisingly the incumbent can receive higher profits after the upstream entry, no matter which supplier she invests in. Moreover, the manufacturer’s optional strategies of technology investee are offered in the presence of the entrant. Given a low production cost of the incumbent, the manufacturer should invest in the entrant, if the production cost ratio between the two suppliers is large and the investment cost difference between them is small, or if the ratio is very large, and the difference is small while the incumbent’s investment cost is small; and she should invest in the incumbent otherwise. Given a high production cost of the incumbent, the manufacturer should invest in the entrant, if the production cost ratio is medium (large), and meanwhile the incumbent’s investment cost, holding a small difference with the entrant’s, is large (small); and she should invest in the incumbent otherwise. Finally, one extension, where the manufacturer invests into both suppliers, is discussed.