An Action-dependent Commitment in Vertical Collaborations of New Product Development

Abstract

Uncertainty is essential in collaborative investment in R&D, especially for new production development (NPD). So, commitments (either formal contracts or informal communications) among members in an R&D alliance are often presented to deal with uncertainty. But after uncertainty is realized, firms may deviate their commitments (called firms’ opportunistic behavior). Then, penalty is further presented to punish firms’ opportunistic behavior. Whether commitment can diminish uncertainty, and is profitable or not for firms? Whether penalty can prohibit opportunity behavior? We attempt to answer these questions by investigating an action-dependent commitment in the context of vertical collaborations of a supplier and a manufacturer for NPD. We show that commitment can diminish the effects of the uncertainties (variances), and increase both firms’ investments and profits compared with no commitment. Moreover, any firm must deviate after uncertainty (its private information) is realized, i.e., opportunity behavior must occur. Thus, we use/present the maximal punishment rule, under which a firm will deviate only if its private information is over a threshold. Finally, we show that the supplier invests more and gets higher profit than the manufacturer from commitment.