Innovation and Technology Diffusion in Competitive Supply Chains

33 Pages Posted: 5 Sep 2017

See all articles by Ayhan Aydin

Ayhan Aydin

George Mason University - Department of Information Systems and Operations Management

Rodney P. Parker

Indiana University Bloomington

Date Written: August 31, 2017


Innovations in consumer products frequently rely on technological advances across multiple tiers in a supply chain. Considering the consumer market demand and downstream investment conditions as input, we model a game in a two-tier supply chain where downstream firms choose to adopt different levels of an upstream technology and an upstream technology leader determines its pricing policy. We identify two necessary but distinct elements for the successful development, adoption, and diffusion of upstream technologies that are sold to lower tiers as components within final products. (1) The level of technology demanded by the market: We develop a measure, Technological Potential, which describes the highest level of an upstream technology demanded by consumer markets. (2) A sufficiently rich return to an upstream innovator, as a function of different levels of technology. From these two elements, we show that the relative magnitudes of two competing sets of consumer market factors determine the Technological Potential whereas the overall magnitude of the factors in both sets determines the return to the upstream developer. We discuss how this difference in consumer market factors' influence on these two elements may determine how different technologies fare in the supply chain. Our results have managerial implications for: investors in research and development project selection in identifying profitable technologies that are also demanded at higher capability levels; and for governments in defining more targeted public policies - for example in choosing the right tier of a supply chain to provide subsidies - to encourage market support for certain technologies.

Keywords: research and development; supply chains; technology; competition; innovation

JEL Classification: C61, C7, C72, C73, L11, L13, M11, O14, O30, O31, O32, O33, O38

Suggested Citation

Aydin, Ayhan and Parker, Rodney P., Innovation and Technology Diffusion in Competitive Supply Chains (August 31, 2017). Kelley School of Business Research Paper, Available at SSRN: or

Ayhan Aydin

George Mason University - Department of Information Systems and Operations Management ( email )

4400 University Drive
Fairfax, VA 22030
United States

Rodney P. Parker (Contact Author)

Indiana University Bloomington ( email )

1309 E 10th Street, HH4129
Bloomington, IN 47405
United States

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