The Optimal Investment Decision for an Innovative Supplier in a Supply Chain

Abstract

We study a supply chain consisting of an upstream supplier who invests in innovation, which increases the value of products to users, and downstream manufacturers who sell to users. Analyzing a bargaining model, we find that the supplier should invest more in innovation under downstream competition than under a downstream monopoly if the supplier does not have strong bargaining power. However, if the supplier already has strong bargaining power, the supplier should make more innovation investment only if the downstream competition is relatively mild. Interestingly, we find that, if the supplier has strong bargaining power, intense competition between downstream manufacturers negatively impacts the supplier’s profit. Finally, we show that a stronger bargaining power may not always benefit manufacturers.