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Outsourcing and Downstream R&D under Economies of Scale
-
Yutian Chen
and
Debapriya Sen
Published/Copyright:
September 14, 2012
Abstract
While the significance of economies of scale in outsourcing has been well-documented, the consequences of outsourcing on firms' R&D efforts, when outsourcing is driven by scale economies, remains unexplored. We investigate a simple model where downstream competitors outsource to a common upstream supplier out of their incentive to better exploit scale economies. We find that the efficiency gain of outsourcing in virtue of economies of scale helps to internalize R&D spillovers, which tends to enhance outsourcing firms' R&D incentives. On the other hand, outsourcing also mitigates downstream competition, which imposes an ambiguous impact on outsourcing firms' R&D incentives. The aggregate effect is that outsourcing enhances R&D investments only when R&D spillovers are sufficiently large, or when upstream economies of scale are sufficiently small.
Published Online: 2012-9-14
©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- Seller Cheap Talk in Almost Common Value Auction
- Strategic Effects of Renegotiation-Proof Contracts
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- The Tennis Coach Problem: A Game-Theoretic and Experimental Study
- Multidimensional Product Differentiation with Discrete Characteristics
- Screening and Financial Contracting in the Face of Outside Competition
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- Commitment versus Flexibility in Enforcement Games
- Endogenous Preferences and Dynamic Contract Design
- Intergenerational Interactions in Human Capital Accumulation
- Behavior-Based Price Discrimination by a Patient Seller
- Altruism and Local Interaction
- Education Signaling with Uncertain Returns
- An Axiomatic Approach to Arbitration and its Application in Bargaining Games
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