Buyer Power and Suppliers' Incentives to Innovate

30 Pages Posted: 5 Sep 2012  

Christian Koehler

Centre for European Economic Research (ZEW)

Christian Rammer

Centre for European Economic Research (ZEW) - Industrial Economics and International Management Research

Date Written: 2012

Abstract

Buyer power is widely considered to decrease innovation incentives of suppliers. However, there is little empirical evidence for this statement. Our paper analyses how buyer power influences innovation incentives of upstream firms while taking into account the type of competition in the downstream market, namely price and technology. We explore this relationship empirically for a unique dataset containing 1,129 observations of German firms from manufacturing and service sectors including information on the economic dependency of firms from their buyers. Using a generalised Tobit model, we find a negative effect of buyer power on a supplier’s likelihood to start R&D activities. This negative effect is mitigated if the supplier faces powerful buyers operating under strong price competition. There is also weak evidence for a negative effect of buyer power on suppliers’ R&D intensity if the powerful buyer operates under strong technology competition.

Keywords: Innovation, Buyer Power

JEL Classification: L11, O31

Suggested Citation

Koehler, Christian and Rammer, Christian, Buyer Power and Suppliers' Incentives to Innovate (2012). ZEW - Centre for European Economic Research Discussion Paper No. 12-058. Available at SSRN: https://ssrn.com/abstract=2141963 or http://dx.doi.org/10.2139/ssrn.2141963

Christian Koehler (Contact Author)

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Christian Rammer

Centre for European Economic Research (ZEW) - Industrial Economics and International Management Research ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

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