Year: 2024
Type: article
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.
Source: Apollo (University of Cambridge)
DOI: 10.17863/cam.113319
Authors: Lauga, DO, Selove, M, Zia, M
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W6963024643
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