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Strategic Spillovers and Incentives for Research and Development

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  • Dietmar Harhoff

    (University of Mannheim, Department of Economics, D68131 Mannheim, Germany and Zentrum für Europäische Wirtschaftsforschung (ZEW), Mannheim, Germany)

Abstract

This paper develops a model in which a monopolist supplier can contribute to downstream product improvements by creating knowledge spillovers which downstream firms use as a substitute for their own R&D efforts. Although a market for R&D information does not exist, the supplier may appropriate an indirect return on R&D for two reasons. Sufficiently high levels of spillover information lead to greater downstream product quality, and spillover information reduces the equilibrium sunk cost of R&D for downstream firms and thus facilitates entry. Both effects cause an expansion of downstream output and enhance the demand for the supplier's intermediate good. Given sufficiently strong incentives for supplier R&D, the locus of R&D shifts partially from the downstream to the upstream industry. R&D expenditures, technological opportunities, and downstream industry structure are determined endogenously. Weak appropriability conditions in the downstream industry enhance innovation incentives in the supply sector.

Suggested Citation

  • Dietmar Harhoff, 1996. "Strategic Spillovers and Incentives for Research and Development," Management Science, INFORMS, vol. 42(6), pages 907-925, June.
    • Handle: RePEc:inm:ormnsc:v:42:y:1996:i:6:p:907-925
    DOI: 10.1287/mnsc.42.6.907
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