On the interaction of technology upgrade and buyer entry in a supply chain

Abstract

This study examines the interaction between technology upgrade and a buyer entry in a supply chain, where an incumbent buyer (he), who upgrades a supplier's production technology through direct investments, may face a rival buyer (she) entering the market by purchasing from the common supplier. We first find the buyer entry can increase the incumbent buyer's incentive to conduct the technology upgrade: if the production cost is high as well as the investment cost is low in the scenario without technology spillover, he will upgrade the production technology to a higher level after the buyer entry. At such level of the upgraded technology, the incumbent buyer is better off in the market with entry, contrary to conventional belief that the entry likely hurts the existing firm. Moreover, our research reveals that upgrading the suppler's production technology can, in turn, influence the buyer entry and further the concentration of the product market. Without technology upgrade or with that but in the absence of technology spillover, the entrant buyer will be fed by the supplier, resulting in a successful entry and thereby a competitive market. However, when technology upgrade occurs along with technology spillover, supplying products to the entrant buyer will be refused by the supplier under a high production cost and a low investment cost, incurring her entry failure and thus the market monopoly.