R&D-Competition Between Vertical Corporate Networks: Market Structure and Strategic R&D-Spillovers

The strategic role of R&D-spillovers within vertical corporate networks (intra-group R&D-spillovers) is neglected in the innovation theory of Industrial Organization. In a two-industry model we formalize the effects of R&D-competition between two vertical corporate networks on supplier-market structures, technological opportunities and on the introduction time of new products. It can be shown that lower transaction costs of organizing vertical corporate networks increase the size of networks and reduce the concentration on supplier-markets. This raises the level of supplier's R&D-activities and lowers the time of development. Additionally, manufacturers have incentives to strategically generate R&D-spillovers within their networks. which improve the technological opportunities of suppliers and increase manufacturers probabilities to win the R&D-competition. This kind of R&D-spillovers can explain the often observed differences of firms' technological opportunities within a given supplier-market.