A dynamic analysis of the investment in product innovation in a supply chain under reference price effect: competition vs cooperation

ABSTRACT

This paper aims to investigate the effects of vertical competition or cooperation along a supply chain on product innovation under the reference effect. To this end, we develop game-theoretical models on the cooperative and non-cooperative supply chains and analyse the optimal decisions of the upstream manufacturer and the downstream retailer. Then, the innovation investment levels under vertical competition and under vertical cooperation are compared. We find that whether the innovation investment is higher under vertical competition depends critically on the strength of the reference effect. In particular, although a stronger reference effect lowers the product innovation investment in a cooperative supply chain, it may instead increase the investment in a non-cooperative supply chain if the retailer shares just a small proportion of the sales revenue with the manufacturer. As a result, the product innovation investment can be higher under vertical competition than under vertical cooperation in the presence of reference price effect, and even more so when the reference price effect grows stronger, the product innovation investment becomes more costly, and the demand for the product becomes more sensitive to price but less sensitive to quality.

KEYWORDS:

• Product innovation
• vertical competition
• reference price effect
• differential games

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [Grant Number 71601159].

Notes on contributors

Jian Ni

Jian Ni is a professor at Southwestern University of Finance and Economics. His research focuses on datadriven modeling and model-based support for decision making in a dynamic environment. His main application domains are innovation policy, investment strategy, and risk management.

Jun Zhao

Jun Zhao is a PhD candidate at University of Hong Kong. His research focuses on operational research and supply chain management. His main application domains are innovation policy, investment strategy, and logistics and service operation management.