Bargaining in Vertical Relationships and Suppliers’ R&D Profitability
35 Pages Posted: 13 Nov 2014
Date Written: November 1, 2014
Abstract
This paper explores the effect of bargaining in vertical relationships on the profitability of suppliers’ R&D investments. Studies on the relationship between R&D and firm profitability mostly concentrate on the impact of horizontal market structure and neglect vertical interactions. Building on theoretical and empirical evidence about the effects of bargaining in vertical relationships, the crucial determinants of a supplier’s bargaining power are identified as the market position and the degree of concentration in the buyer portfolio. With respect to R&D profitability the latter is expected to diminish returns from R&D, while the former is expected to increase it. The hypotheses are tested using a sample of 472 German manufacturing firms. The empirical findings support all hypotheses and highlight the importance of taking a supplier’s bargaining power into account when estimating R&D profitability. The estimated effects are considerable: for an average R&D performing supplier an increase of R&D intensity in 2010 by a percentage point would reduce profits by about 14% in 2012 given the supplier depends completely on the largest three buyers and does hold an average market share. Contrastingly, a monopolist R&D performing supplier with average buyer concentration would experience a profit increase by 10% in 2012.
Keywords: Bargaining, Firm performance, Vertical relationships
JEL Classification: D22, L22, O32
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