Cooperative and noncooperative R&D in duopoly manufacturers with a common supplier

We consider the R&D strategy of firms under competitive environments from the supply chain perspective. Specifically, we investigate a supply chain consisting of one upstream component supplier and two downstream manufacturers, who however are the Stackelberg leader(s). At the early stage (R&D stage), the two manufacturers decide on whether to cooperate or not in the R&D activities and how much to invest in R&D accordingly. At the late stage (market stage), the component supplier decides on the uniform wholesale price and the manufacturers decide on the production quantities. Our main findings include: (ⅰ) Cooperative R&D strategy will be adopted when the technology spillover effect is either too large or too small and in contrast non-cooperative strategy will be accepted when the spillover effect is moderate. However, the underlying driving forces for coordination are different when the spillover effect is small or large, i.e., cost reduction effect and sales increasing effect. (ⅱ) Cooperative R&D could increase the social welfare when both the technology spillover effect and the (initial) unit production cost are high. (ⅲ) As the equilibrium under the cooperative R&D strategy is unstable, we give a coordination mechanism, to guarantee the stability of cooperative R&D investments.