R & D Incentives and Spillovers in a Two-Industry Model

This paper develops a two-industry model ofR&D. A monopolist supplier sells an intermediate good to an oligopolistic buyer industry where firms compete in quantity and quality-enhancing R&D. The supplier can contribute to downstream product improvements by creating spillover knowledge which downstream firms use as a substitute for their own R&D efforts. Even if a market for R&D information fails to 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 infonnation reduces the sunk cost of R&D necessary to enter the downstream industry. 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 intensities, technological opportunities, and the industry structure of the downstream industry are determined endogenously. The R&D behavior ofsupplier and buyer firms is characterized by switching equilibria, thereby providing support for the notion of distinct "technological regimes".

Harhoff, Dietmar (1991), R & D Incentives and Spillovers in a Two-Industry Model, ZEW Discussion Paper No. 91-06, Mannheim.