Resource title

How Strong Buyers Spur Upstream Innovation

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Resource description

We challenge the view that the presence of powerful buyers stifles suppliers´ incentives to innovate. Following Katz (1987), we model buyer power as buyers´ ability to substitute away from a given supplier and isolate several effects that support the opposite view, namely that the presence of powerful buyers induces a supplier to invest more in cost reduction. In contrast in negotiations with smaller buyers, the outcome of negotiations with large buyers is fully determined by their more valuable alternative supply option. This increases the supplier´s incentives to reduce marginal costs, both as the supplier receives a larger fraction of the thereby generated incremental profits and as this makes buyers´ alternative supply option less valuable. The latter effect is due to downstraem competition between buyers and, as we show, is also stronger the larger and thus the more powerful buyers are.

Resource author

Roman Inderst, Christian Wey

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/18375

Resource license

Adapt according to the presented license agreement and reference the original author.