In-house or Outsourcing R&D? Manufacturer Technology Strategy in the Presence of Market Follower Encroachment

Abstract

Facing the threat of market follower encroachment, this paper constructs game theoretical models based on different channel structures and market structures, investigates following manufacturer’s encroachment strategy and technology strategies, and discusses the impact of following manufacturer’s strategy on quality decisions. The results show that encroachment always improves consumer surplus by slashing prices when leading manufacturer adopts in-house R&D (IRD); otherwise, it results in lower consumer surplus with mild competition if leading manufacturer is at a technological disadvantage. Furthermore, the technology strategies of following manufacturer are related to their R&D capabilities. The superior one is outsourcing R&D (ORD) for the manufacturers when their R&D capability is weak, otherwise, IRD is optimal. In a word, the leading manufacturer always prefers IRD under certain conditions, while the following manufacturer always prefers ORD. In addition, encroachment restrains quality innovative motivation under fixed or quality-sensitive R&D costs, but can improve quality level when consumers have a higher reference dependency for quality; meanwhile, the following manufacturer adopting ORD is always beneficial to quality improvement.

Keywords

Quality differentiation / channel encroachment / outsourcing R&D / in-house R&D / leading product / following product

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