Technology Spillovers and Outside Options in a Bilateral Duopoly
ISER DP No. 1039
29 Pages Posted: 20 Aug 2018
Date Written: August 6, 2018
Abstract
This paper examines the role of outside options in a downstream duopoly with exclusive vertical relations as in the Japanese automobile industry. In our setup, the downstream firms have outside options, and two upstream firms with exclusive relations can engage in cost reducing investments. More interestingly, each upstream firm can choose whether to voluntarily generate technology spillovers to its rival. We show that better outside options of the downstream firms can induce voluntary technology spillovers in the upstream level, increasing the profits of all firms on the vertical chain.
Keywords: Trategic Sourcing, Outside Option, Spillovers, Vertical Relations
JEL Classification: L13, O32, M11, C72
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