Abstract
This paper studies firms’ innovation behavior in a supply chain where two firms first invest to reduce component’ cost according to different innovation modes (non-cooperative innovation, sequential innovation, and cooperative innovation) and then decide the prices according to different market powers (Supplier-Stackelberg, Manufacturer-Stackelberg, and Nash). We find that both the supplier and the manufacturer make more innovation efforts and profits under sequential innovation than under non-cooperative innovation when the market power is any one of three structures. Moreover, the firm prefers to invest as the follower in sequential innovation. We also show that the firms are easy to achieve cooperative innovation under symmetrical power market structure than asymmetrical power market structure. By using a concept named innovation-desirability-index that measures a firm’s desire to innovate in the supply chain, we show that it is optimal for a firm in the chain to cooperate with such a firm whose market power is close to his own if the innovation-desirability-index is higher, otherwise with such a firm whose market power is lower to his own.
Highlights
Businesses are increasingly relying on their suppliers to reduce costs, improve quality, and develop new processes and products faster than their rivals’ vendors can
Under the non-cooperative innovation mode (N), it is optimal for a firm in the chain to cooperate with such a firm whose bargaining power is close to his own if the innovation-desirability-index is higher
We have studied a supply chain where two firms first cooperate to invest on reducing component cost according to different modes and compete for price according to different market powers
Summary
Businesses are increasingly relying on their suppliers to reduce costs, improve quality, and develop new processes and products faster than their rivals’ vendors can. Both firms decide their investments on supplier’s cost reduction according to some specified innovation modes and in the second stage, two firms determine their prices according to different market power structures. For a supply chain with two manufacturers and one retailer, Choi [2] analyzes price competition via three non-cooperative games with different power structures: the manufacturer Stackelberg game, the retailer Stackelberg game, and the Nash game He shows that all members are better off when no one dominates the others. Wei et al [25] explore the pricing problems with regard to two complementary products in a supply chain with two manufacturers and one common retailer by considering market power.
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