Research ArticleStability Analysis of R&D Cooperation in a Supply Chain
Luyun Xu,1 Dong Liang,2 Zhenjie Duan,2 and Xu Xiao2
1College of Business Administration, Hunan University, Changsha 410082, China2College of Mathematics and Computer Science, Hunan Normal University, Changsha 410081, China
Correspondence should be addressed to Luyun Xu; [email protected]
Received 18 May 2015; Accepted 13 August 2015
Academic Editor: Leonid Shaikhet
Copyright ยฉ 2015 Luyun Xu et al.This is an open access article distributed under theCreativeCommonsAttribution License, whichpermits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
R&D outsourcing becomes the often-adopted strategy for firms to innovate. However, R&D cooperation often ends up with failurebecause of its inherent quality of instability. One of the main reasons for cooperation failure is the opportunistic behavior. As theR&Dcontract between firms is inherently incomplete, opportunistic behavior always cannot be avoided in the collaborative process.R&D cooperation has been divided into horizontal and vertical types. This paper utilizes game theory to study opportunisticbehavior in the vertical R&D cooperation and analyzes the equilibrium of the cooperation. Based on the equilibrium and numericalresults, it is found that the vertical R&D cooperation is inherently unstable, and the downstream firm is more likely to break theagreement. The level of knowledge spillovers and the cost of R&D efforts have different effects on firmsโ payoffs. When the levelof knowledge spillover is low or the cost of R&D efforts is high, mechanisms such as punishment for opportunism may be moreeffective to guarantee the stability of cooperation.
1. Introduction
In the knowledge economy era, the competition of technicalmarket is increasingly fierce, and firms are forced to acceleratethe process of technical innovation. However, it is moredifficult for firms to accomplish knowledge creation andtechnological innovation in isolation [1]. R&D outsourcingbecomes the often-adopted strategy for firms to innovate.R&D cooperation becomes a common phenomenon, whichhelps firms in sharing risk and cost, accessing knowledgeand technological know-how network, and internalizing theexternalities created by knowledge spillovers [2โ4]. Despitethese advantages, the inherent quality of instability of R&Dcooperation oftenmay not be avoided, and R&D cooperationoften ends with failure [5โ8]. A main reason for cooperationfailure is the opportunistic behavior by one party or theother [9, 10]. Opportunism appears due to the cooperativeand competitive relationship of the two collaborative firms.Opportunism is defined as selfish behavior which meansseeking a firmโs self-interest with deceit at the expense ofits partners [11โ13]. As the R&D contract between firms isinherently incomplete, firms in the cooperation are often notaccessible to the detailed information aboutwhat the partners
are expected to do, and it is impossible for a third partyto keep watch on R&D efforts [14]. Therefore, opportunisticbehavior always cannot be avoided in the collaborativeprocess.
Based on the types of collaborative partnership, R&Dcooperation has been divided into horizontal and verticalR&D cooperation. Many of research works have been doneabout these two types of R&D cooperation [15โ20]. Althoughfirms may arrange their R&D inputs to realize the maximiza-tion of the total profit of the two firms, opportunism maystill prevail in these two types of R&D cooperation. Suchnoncooperative behavior may prevent a firm from losingits competitive knowledge. However, it would lead to theinstability of the cooperation. Kesteloot and Veugelers studythe stability of horizontal R&D cooperation in a repeatedgame and emphasize the important role of spillovers [21].Cabon-Dhersin and Ramani use a noncooperative game todiscuss the effect of trust on horizontal R&D cooperation,and they find that when opportunism cannot be avoided, thenature of firms, the configurations of trust, and the level ofspillovers decide whether the horizontal R&D cooperation issuccessful or not [14]. Cassiman and Veugelers find that, invertical cooperation, the effectiveness of strategic protection
Hindawi Publishing CorporationMathematical Problems in EngineeringVolume 2015, Article ID 409286, 10 pageshttp://dx.doi.org/10.1155/2015/409286
2 Mathematical Problems in Engineering
is important to induce cooperation [22]. Lhuillery and Pfisterfind that vertical R&D cooperation also faces a higher risk offailures [23].
Most of the existing literatures using game theoreticalapproach have studied the stability of horizontal R&D coop-eration. Our paper uses a game theoretical approach to ana-lyze the stability of the vertical R&D cooperation. We focuson opportunistic behavior in the vertical R&D cooperation.The results of this paper indicate that the vertical R&Dcooperation is unstable, and the downstream firm is morelikely to break the agreement. When building a partnership,firms need to consider the social statue and reputation of itspartner and mutual trust between the two firms. This paperalso identifies the roles of knowledge spillover and the cost ofR&D effort in the stability of vertical R&D cooperation.Thesetwo factors influence the firmsโ payoffs in different situations.And they play different roles in the decision process. It isfound that when the level of knowledge spillover is low or thecost of R&D efforts is high, mechanisms such as punishmentfor opportunism may be more effective.
The rest of this paper is given as follows. Section 2 intro-duces the model of our paper. Section 3 gives the equilibriumanalysis of the game and analyzes the effects of spillover leveland R&D effort cost on stability of the game. Section 4 pre-sents numerical illustration and Section 5 gives the conclu-sion of this paper.
2. The Model
In the part, we present the model in two subsections. Ourgame model is described in the first subsection. R&D expen-ditures and payoffs in different situations are solved in thesecond subsection.
2.1. Description of Game Model. Studies show that singlesource brings long-term benefits if used appropriately [24]and one or two suppliers are usually [25, 26] enough for amanufacturer. Following Ge et al. [20], we consider cooper-ative R&D in a simple supply chain with a final-goodmanufacturer (denoted as Firm ๐ด) and an input supplier(denoted as Firm ๐ต) in our model.
We assume that Firm ๐ด decides its production quantitybased on the market demand and then submits its order toFirm ๐ต. Firm ๐ต sells inputs to Firm ๐ด in the market. The twofirms in the supply chain establish a vertical strategic R&Dcollaboration link. The reduction of marginal cost in ourstudy is an R&D production function following dโAspremontand Jacquemin [5]. In the vertical R&D cooperation,firms coordinate their R&D inputs and then allocate R&Dresources to reduce the production costs. The reduction ofmarginal production cost comes from a firmโs own research.Meanwhile, R&D efforts of its cooperator also help reducingthe firmโs cost due to positive spillovers. Let ๐ฝ โ [0, 1] be theparameter reflecting the spillover level between firms. Thespillover levels of the two firms in the vertical R&D cooper-ation are assumed to be symmetric. We also assume that thefixed costs of firms are set to be zero. Let ๐
๐and ๐๐> 0 denote
the original marginal cost and let ๐๐denote the R&D efforts of
firm ๐. Therefore, the marginal cost ๐๐after R&D investment
of firm ๐ is written as follows:
๐๐= ๐๐โ ๐๐โ ๐ฝ๐๐, ๐, ๐ = ๐ด, ๐ต, ๐ ฬธ= ๐. (1)
We assume that R&D investment is costly. Given a level๐๐โ [0, ๐
๐) of R&D efforts, the cost of efforts is given by
(1/2)๐พ๐๐
2, and ๐พ is a technological parameter and satisfies๐พ > 0, indicating diminishing returns to R&D.
In the production market, let us suppose that Firm ๐ตproduces the inputs and sells them to Firm ๐ด at price ๐
๐ , and
Firm๐ด uses the inputs to produce final goods. Let us supposethat the inverse demand function in the market is given by๐ = ๐ โ ๐, where ๐ represents the price of a final product and๐ represents the total production quantity of final goods pro-duced by Firm๐ด. At the same time, the order quantity of Firm๐ด is equal to production quantity of final goods. Given anR&D profile (๐
๐ด, ๐๐ต) of the two firms, the quantity ๐ of final
goods and the input price ๐๐of Firm ๐ต and the net profits of
Firm ๐ด and Firm ๐ต, (๐๐ด, ๐๐ต), can be written as follows:
๐๐ด= (๐ โ ๐ โ ๐
๐ด+ ๐๐ด+ ๐ฝ๐๐ต) ๐ โ ๐
๐๐ โ1
2๐พ๐๐ด
2, (2)
๐๐ต= (๐๐โ ๐๐ต+ ๐๐ต+ ๐ฝ๐๐ด) ๐ โ1
2๐พ๐๐ต
2. (3)
As the game is dynamic, we can use the backward intro-duction method. We start with the quantity of final goods.Firm ๐ด chooses its output level independently to realize themaximization of its own profit. For any configuration of R&Defforts (๐
๐ด, ๐๐ต) invested by Firm ๐ด and Firm ๐ต, the optimal
condition for the profit maximization of Firm ๐ด is given by
๐๐๐ด
๐๐= ๐ โ 2๐ โ ๐
๐ด+ ๐๐ด+ ๐ฝ๐๐ตโ ๐๐= 0. (4)
Then the production quantity of the final product can begot by
๐ =1
2(๐ โ ๐
๐ด+ ๐๐ด+ ๐ฝ๐๐ตโ ๐๐) . (5)
Substituting (5) into (3), the net profit function of Firm ๐ตcan be rewritten as
๐๐ต=1
2(๐๐โ ๐๐ต+ ๐๐ต+ ๐ฝ๐๐ด) (๐ โ ๐
๐ด+ ๐๐ด+ ๐ฝ๐๐ตโ ๐๐)
โ1
2๐พ๐๐ต
2.
(6)
By solving partial derivatives of (6) about ๐๐for profit
maximization, the optimal input price can be got as follows:
๐๐=1
2[๐ โ ๐
๐ด+ ๐๐ต+ (1 โ ๐ฝ) ๐
๐ดโ (1 โ ๐ฝ) ๐
๐ต] . (7)
Then the production quantity of the final product can beobtained as follows:
๐ =1
4[๐ โ ๐
๐ดโ ๐๐ต+ (1 + ๐ฝ) ๐
๐ด+ (1 + ๐ฝ) ๐
๐ต] . (8)
Mathematical Problems in Engineering 3
Therefore, the net profits of Firm๐ด and Firm๐ต are gainedas
๐๐ด=1
16[๐ โ ๐๐ดโ ๐๐ต+ (1 + ๐ฝ) (๐
๐ด+ ๐๐ต)]2โ1
2๐พ๐๐ด
2,
๐๐ต=1
8[๐ โ ๐๐ดโ ๐๐ต+ (1 + ๐ฝ) (๐
๐ด+ ๐๐ต)]2โ1
2๐พ๐๐ต
2.
(9)
The total profit of the supply chain profit is
๐๐= ๐๐ด+ ๐๐ต=3
16[๐ โ ๐๐ดโ ๐๐ต+ (1 + ๐ฝ) (๐
๐ด+ ๐๐ต)]2
โ1
2๐พ (๐๐ด
2+ ๐๐ต
2) .
(10)
2.2. R&D Expenditures and Payoffs in Different Situations.After establishing the R&D cooperation, firms choose theirlevels of R&D efforts. Each firm has two choices. One is toinvest on R&D efforts to maximize the total profit of the twofirms, which is treated as reciprocal behavior. Another is toinvest on R&D efforts to maximize a firmโs own profit, whichis regarded as opportunistic behavior. After that, each firminvests in its R&D efforts, and this is not observable. Withthe above discussion, we can now solve for the R&D effortsand the corresponding net profits in four different situationsof vertical R&D cooperation.
First, Firms๐ด and๐ต both choose reciprocal behavior, andwe will define this situation as situation ๐ ๐ . In this situation,each firm decides its R&D efforts by the maximization of thetotal profit. Then the optimal condition for situation ๐ ๐ isobtained as follows:
๐๐๐
๐๐๐ด
=3
8(1 + ๐ฝ) [๐ + (1 + ๐ฝ) (๐
๐ด+ ๐๐ต)] โ ๐พ๐
๐ด= 0,
๐๐๐
๐๐๐ต
=3
8(1 + ๐ฝ) [๐ + (1 + ๐ฝ) (๐
๐ด+ ๐๐ต)] โ ๐พ๐
๐ต= 0,
(11)
where ๐ = ๐ โ ๐๐ดโ ๐๐ต.
By solving (11), we can, respectively, define the R&Defforts and net profits of Firm ๐ด and Firm ๐ต in situation ๐ ๐ as follows:
๐๐ด= ๐๐ต=3๐ (1 + ๐ฝ)
8๐พ โ 6 (1 + ๐ฝ)2,
๐A =๐พ๐2[4๐พ โ 4.5 (1 + ๐ฝ)
2]
[8๐พ โ 6 (1 + ๐ฝ)2]2,
๐๐ต=
๐พ๐2[8๐พ โ 4.5 (1 + ๐ฝ)
2]
[8๐พ โ 6 (1 + ๐ฝ)2]2.
(12)
Second, Firms๐ด and ๐ต both choose opportunistic behav-ior, defined as situation ๐๐. In this situation, each firm
decides its R&D efforts by the maximization of its own profit.Then the optimal condition for situation ๐๐ is expressed by
๐๐๐ด
๐๐๐ด
=1
8(1 + ๐ฝ) [๐ + (1 + ๐ฝ) (๐
๐ด+ ๐๐ต)] โ ๐พ๐
๐ด= 0,
๐๐๐ต
๐๐๐ต
=1
4(1 + ๐ฝ) [๐ + (1 + ๐ฝ) (๐
๐ด+ ๐๐ต)] โ ๐พ๐
๐ต= 0.
(13)
And the R&D efforts and net profits of Firm ๐ด and Firm๐ต in situation ๐๐ can be separately defined as follows:
๐๐ด=๐ (1 + ๐ฝ)
8๐พ โ 3 (1 + ๐ฝ)2,
๐๐ต=2๐ (1 + ๐ฝ)
8๐พ โ 3 (1 + ๐ฝ)2,
๐๐ด=
๐พ๐2[4๐พ โ 0.5 (1 + ๐ฝ)
2]
[8๐พ โ 3 (1 + ๐ฝ)2]2,
๐๐ต=
๐พ๐2[8๐พ โ 2 (1 + ๐ฝ)
2]
[8๐พ โ 3 (1 + ๐ฝ)2]2.
(14)
Third, we will define this situation as situation ๐ ๐, whereFirm ๐ด chooses reciprocal behavior and Firm ๐ต choosesopportunistic behavior. At this time, Firm๐ด decides its R&Defforts for the best interest of the cooperation, while Firm ๐ตchooses to cheat.Then the optimal condition for situation๐ ๐is written by
๐๐๐
๐๐๐ด
=3
8(1 + ๐ฝ) [๐ + (1 + ๐ฝ) (๐
๐ด+ ๐๐ต)] โ ๐พ๐
๐ด= 0,
๐๐๐ต
๐๐๐ต
=1
4(1 + ๐ฝ) [๐ + (1 + ๐ฝ) (๐
๐ด+ ๐๐ต)] โ ๐พ๐
๐ต= 0.
(15)
And the R&D efforts and net profits of Firm ๐ด and Firm๐ต in situation ๐ ๐ are severally defined as follows:
๐๐ด=3๐ (1 + ๐ฝ)
8๐พ โ 5 (1 + ๐ฝ)2,
๐๐ต=2๐ (1 + ๐ฝ)
8๐พ โ 5 (1 + ๐ฝ)2,
๐๐ด=
๐พ๐2[4๐พ โ 4.5 (1 + ๐ฝ)
2]
[8๐พ โ 5 (1 + ๐ฝ)2]2,
๐๐ต=
๐พ๐2[8๐พ โ 2 (1 + ๐ฝ)
2]
[8๐พ โ 5 (1 + ๐ฝ)2]2.
(16)
4 Mathematical Problems in Engineering
Table 1: R&D efforts and payoffs of Firms A and B in different situations.
Situation ๐ ๐ ๐๐ ๐ ๐ ๐๐
๐๐ด
3๐ (1 + ๐ฝ)
8๐พ โ 6 (1 + ๐ฝ)2
๐ (1 + ๐ฝ)
8๐พ โ 3 (1 + ๐ฝ)2
3๐ (1 + ๐ฝ)
8๐พ โ 5 (1 + ๐ฝ)2
๐(1 + ๐ฝ)
8๐พ โ 4(1 + ๐ฝ)2
๐๐ต
3๐ (1 + ๐ฝ)
8๐พ โ 6 (1 + ๐ฝ)2
2๐ (1 + ๐ฝ)
8๐พ โ 3 (1 + ๐ฝ)2
2๐ (1 + ๐ฝ)
8๐พ โ 5 (1 + ๐ฝ)2
3๐ (1 + ๐ฝ)
8๐พ โ 4 (1 + ๐ฝ)2
๐๐ด
๐2(4 โ 4.5๐ฟ)
(8 โ 6๐ฟ)2
๐2(4 โ 0.5๐ฟ)
(8 โ 3๐ฟ)2
๐2(4 โ 4.5๐ฟ)
(8 โ 5๐ฟ)2
๐2(4 โ 0.5๐ฟ)
(8 โ 4๐ฟ)2
๐๐ต
๐2(8 โ 4.5๐ฟ)
(8 โ 6๐ฟ)2
๐2(8 โ 2๐ฟ)
(8 โ 3๐ฟ)2
๐2(8 โ 2๐ฟ)
(8 โ 5๐ฟ)2
๐2(8 โ 4.5๐ฟ)
(8 โ 4๐ฟ)2
Similarly, when ๐ด chooses opportunistic behavior andFirm ๐ต chooses reciprocal behavior, we can define R&Defforts and net profits in situation ๐๐ as follows:
๐๐ด=๐ (1 + ๐ฝ)
8๐พ โ 4 (1 + ๐ฝ)2,
๐๐ต=3๐ (1 + ๐ฝ)
8๐พ โ 4 (1 + ๐ฝ)2,
๐๐ด=
๐พ๐2[4๐พ โ 0.5 (1 + ๐ฝ)
2]
[8๐พ โ 4 (1 + ๐ฝ)2]2,
๐๐ต=
๐พ๐2[8๐พ โ 4.5 (1 + ๐ฝ)
2]
[8๐พ โ 4 (1 + ๐ฝ)2]2.
(17)
The details in four situations are summarized in Table 1,where ๐ฟ = (1 + ๐ฝ)2/๐พ, and ๐ฟ increases with the spillover levelbetween cooperative firms but decreaseswith the cost of R&Defforts.We will assume that 0 < ๐ฟ < 8/9 to make sure that theR&D investment and production quantity exist.
3. Equilibrium Analysis
In this part, we first compare the payoffs of Firm ๐ด and Firm๐ต in different statuses and obtain the equilibrium of the game.Second, we, respectively, discuss the effects of spillover leveland R&D cost on profits of four different situations.
3.1. Comparison of Payoffs in Different Status. According tothe behavior decision-making and the corresponding profit,the payoff matrix of different R&D investment profiles isgiven in Table 2. Given the comparison of the profits betweendifferent situations, three lemmas have been derived in thefollowing.
Lemma 1. Comparison of payoffs of Firm ๐ด in four differentsituations is as follows:
(1) If Firm๐ด is reciprocal while its partner is opportunistic,Firm ๐ด will get a lower profit compared with the profit
Table 2: The payoff matrix of different R&D investment profiles.
Firm ๐ตReciprocalbehavior
Opportunisticbehavior
Firm ๐ดReciprocal behavior (๐๐ ๐
๐ด, ๐๐ ๐ ๐ต) (๐๐ ๐
๐ด, ๐๐ ๐๐ต)
Opportunistic behavior (๐๐๐ ๐ด, ๐๐๐ ๐ต) (๐๐๐
๐ด, ๐๐๐๐ต
)
yielded by the R&D cooperation with two reciprocalfirms
๐๐ ๐
๐ด> ๐๐ ๐
๐ด. (18)
(2) If Firm๐ด is opportunistic while its partner is reciprocal,Firm๐ดwill get a higher profit compared with the profityielded by the R&D cooperation with two opportunisticfirms
๐๐๐
๐ด> ๐๐๐
๐ด. (19)
(3) Firm ๐ด will get a higher profit from R&D cooperationwith two opportunistic firms than the R&Dcooperationwith two reciprocal firms
๐๐๐
๐ด> ๐๐ ๐
๐ด. (20)
The particulars of the derivations are presented in theappendix. From the results of Lemma 1, the profit comparisonof Firm ๐ด in four different situations is given as follows:
๐๐๐
๐ด> ๐๐๐
๐ด> ๐๐ ๐
๐ด> ๐๐ ๐
๐ด. (21)
In the vertical R&D cooperation, for any value of the costeffort ๐พ and the spillover level ๐ฝ, the downstream firm alwaysbenefits more from opportunistic behavior. Cheating is anoptimal strategy for Firm ๐ด in cooperation game.
Lemma 2. Comparison of payoffs of Firm ๐ต in four differentsituations is as follows:
(1) If Firm ๐ต is reciprocal while its partner is opportunistic,Firm ๐ต will get a lower profit compared with the profit
Mathematical Problems in Engineering 5
yielded by the R&D cooperation with two reciprocalfirms
๐๐ ๐
๐ต> ๐๐๐
๐ต. (22)
(2) If Firm ๐ต is opportunistic while its partner is reciprocal,Firm ๐ต will get a higher profit compared with the profityielded by the R&D cooperation with two opportunisticfirms
๐๐ ๐
๐ต> ๐๐๐
๐ต. (23)
(3) If Firm ๐ต is reciprocal while its partner is opportunistic,Firm ๐ต will get a lower profit compared with the profityielded by the R&D cooperation with two opportunisticfirms
๐๐๐
๐ต> ๐๐๐
๐ต. (24)
(4) Firm ๐ต will get a higher profit from R&D cooperationwith two reciprocal firms than the R&D cooperationwith two opportunistic firms
๐๐ ๐
๐ต> ๐๐๐
๐ต. (25)
(5) When the inequality 0 < ๐ฟ < (80 โ โ1216)/81 issatisfied, Firm ๐ต will get a higher profit from theR&D cooperation with only Firm ๐ต cheating thanthe cooperation with two reciprocal firms. When theinequality (80โโ1216)/81 < ๐ฟ < 8/9 is satisfied, Firm๐ตwill get a lower profit from the R&D cooperation withonly Firm ๐ต cheating than the cooperation with tworeciprocal firms
When 0 < ๐ฟ < 80 โโ1216
81,
๐๐ ๐
๐ต> ๐๐ ๐
๐ต
When 80 โโ1216
81< ๐ฟ <8
9,
๐๐ ๐
๐ต> ๐๐ ๐
๐ต.
(26)
The particulars of the derivations are also presentedin the appendix. From the results of Lemma 2, the profitcomparison of Firm ๐ต in four different situations is given asfollows:
When 0 < ๐ฟ < 80 โโ1216
81,
๐๐ ๐
๐ต> ๐๐ ๐
๐ต> ๐๐๐
๐ต> ๐๐๐
๐ต
When 80 โโ1216
81< ๐ฟ <8
9,
๐๐ ๐
๐ต> ๐๐ ๐
๐ต> ๐๐๐
๐ต> ๐๐๐
๐ต.
(27)
In the vertical R&D cooperation, the optimal strategy forFirm๐ต is influenced by the R&Deffort cost ๐พ and the spilloverlevel ๐ฝ. Lower value of ๐ฟ indicates that the cost of R&D effortsmay be high or the spillover level may be low. Upstream Firm๐ต benefits more from opportunistic behavior. Higher valueof ๐ฟ indicates that the cost of R&D efforts may be low or thespillover level may be high. At this time, reciprocal behaviorof two firms yields the highest profit to Firm ๐ต.
Based on the above analysis, we can obtain the equilib-rium of the game. At the equilibrium, the optimal strategiesfor both of the two firms are choosing opportunistic behavior.Therefore, the vertical R&D cooperation is inherently unsta-ble.
3.2. Effects of Spillover and R&D Cost on Profits. As men-tioned above, the value of๐ฟdepends on the level of knowledgespillover and the cost of R&D effort. In this part, we mainlyanalyze their effects on the profits of Firm ๐ด and Firm ๐ต indifferent situations.
Proposition 3. In the vertical R&D cooperation, the profits ofFirm๐ด gained from reciprocal behavior decrease when the levelof spillover ๐ฝ increases and the cost of R&D efforts ๐พ declines.
Proof. Consider
๐๐๐ ๐
๐ด
๐๐ฟ=๐๐2(4 โ 4.5๐ฟ) (8 โ 6๐ฟ)
โ2
๐๐ฟ
= โ4.5๐2(8 โ 6๐ฟ)
โ2
+ 12๐2(4 โ 4.5๐ฟ) (8 โ 6๐ฟ)
โ3
=โ4.5๐
2(8 โ 6๐ฟ) + 12๐
2(4 โ 4.5๐ฟ)
(8 โ 6๐ฟ)3
=๐2(8 โ 27๐ฟ)
(8 โ 6๐ฟ)3< 0.
(28)
Similarly, it is easy to obtain ๐๐๐ ๐๐ด/๐๐ฟ = ๐
2(4โ22.5๐ฟ)/(8โ
5๐ฟ)3< 0. The values of ๐๐ ๐
๐ดand ๐๐ ๐
๐ดdecrease with the
increase of the value of ๐ฟ. As ๐ฟ = (1 + ๐ฝ)2/๐พ, we can learn thatwhen the level of spillover ๐ฝ increases and the cost of R&Defforts ๐พ declines, the profits of Firm๐ด gotten from reciprocalbehavior decrease.
Proposition 4. In the vertical R&D cooperation, the profits ofFirm ๐ด gained from opportunistic behavior increase when thelevel of spillover ๐ฝ rises and the cost of R&D efforts ๐พ declines.
Proof. Consider
๐๐๐๐
๐ด
๐๐ฟ=๐๐2(4 โ 0.5๐ฟ) (8 โ 3๐ฟ)
โ2
๐๐ฟ
= โ0.5๐2(8 โ 3๐ฟ)
โ2
+ 6๐2(4 โ 0.5๐ฟ) (8 โ 3๐ฟ)
โ3
6 Mathematical Problems in Engineering
Table 3: The profits of four situations in different levels of spillovers.
๐ฝ ๐ฟ ๐๐ ๐
๐ด๐๐๐
๐ด๐๐ ๐
๐ด๐๐๐
๐ด๐๐ ๐
๐ต๐๐๐
๐ต๐๐ ๐
๐ต๐๐๐
๐ต
0.00 0.20 167.60 178.05 158.16 188.08 383.87 346.97 387.76 342.400.10 0.24 169.73 183.28 157.85 196.11 402.96 355.12 407.56 349.400.20 0.29 171.84 189.31 157.09 205.57 426.05 364.48 431.29 357.390.30 0.34 173.77 196.24 155.65 216.71 454.16 375.17 459.86 366.490.40 0.39 175.24 204.22 153.23 229.87 488.72 387.40 494.50 376.840.50 0.45 175.77 213.41 149.34 245.51 531.77 401.38 536.86 388.590.60 0.51 174.59 224.01 143.27 264.21 586.37 417.39 589.32 401.960.70 0.58 170.29 236.29 133.94 286.76 657.16 435.78 655.25 417.190.80 0.65 160.27 250.58 119.61 314.23 751.69 456.99 739.71 434.580.90 0.72 139.55 267.29 97.42 348.13 882.81 481.56 850.45 454.511.00 0.80 97.66 286.99 62.50 390.63 1074.22 510.20 1000.00 477.43
=โ0.5๐
2(8 โ 3๐ฟ) + 6๐
2(4 โ 0.5๐ฟ)
(8 โ 3๐ฟ)3
=๐2(20 โ 1.5๐ฟ)
(8 โ 3๐ฟ)3> 0.
(29)
Similarly, it is easy to obtain ๐๐๐๐ ๐ด/๐๐ฟ = ๐
2(28 โ 2๐ฟ)/(8 โ
4๐ฟ)3> 0.The values of๐๐๐
๐ดand๐๐๐ ๐ด
increasewith the value of๐ฟ growing. As๐ฟ = (1 + ๐ฝ)2/๐พ, we can learn thatwhen the levelof spillover๐ฝ increases and the cost of R&D efforts ๐พ declines,the profits of Firm๐ด gotten from opportunistic behavior rise.
Proposition 5. In the vertical R&D cooperation, the profits ofFirm๐ต in four situations will increase when the level of spillover๐ฝ rises and the cost of R&D efforts ๐พ declines.
Proof. Consider
๐๐๐ ๐
B๐๐ฟ=๐๐2(8 โ 4.5๐ฟ) (8 โ 6๐ฟ)
โ2
๐๐ฟ
= โ4.5๐2(8 โ 6๐ฟ)
โ2
+ 12๐2(8 โ 4.5๐ฟ) (8 โ 6๐ฟ)
โ3
=โ4.5๐
2(8 โ 6๐ฟ) + 12๐
2(8 โ 4.5๐ฟ)
(8 โ 3๐ฟ)3
=๐2(60 โ 27๐ฟ)
(8 โ 6๐ฟ)3> 0.
(30)
Similarly, it is easy to obtain ๐๐๐ ๐๐ต/๐๐ฟ = ๐
2(64โ10๐ฟ)/(8โ
5๐ฟ)3> 0, ๐๐๐๐
๐ต/๐๐ฟ = ๐
2(32 โ 6๐ฟ)/(8 โ 3๐ฟ)
3> 0, and ๐๐๐๐
๐ต/
๐๐ฟ = ๐2(28โ16๐ฟ)/(8โ4๐ฟ)
3> 0.The values of ๐๐ ๐
๐ต, ๐๐ ๐๐ต
, ๐๐๐๐ต
,and ๐๐๐
๐ตgo up with the value of ๐ฟ increasing. As ๐ฟ =
(1 + ๐ฝ)2/๐พ, we can learn that when the level of spillover
๐ฝ increases and the cost of R&D efforts ๐พ declines, the profitsof Firm ๐ต gotten from the vertical cooperation rise.
4. Numerical Illustration
In this section, we use numerical illustration to discuss theprofits in four different situations and analyze the effects ofthe level of knowledge spillover and the cost of R&D effortson the stability of the R&D cooperation.
First, in order to analyze the effects of spillover levels onthe two firmsโ profits in different situations, we assume thebasic parameters to be as follows:
๐ = 100,
๐๐ด= 30,
๐๐ต= 20,
๐พ = 5.
(31)
From Table 3 it can be seen that the profits of Firm ๐ด inthe four situations satisfy ๐๐๐
๐ด> ๐๐๐
๐ด> ๐๐ ๐
๐ด> ๐๐ ๐
๐ด. As the
level of knowledge spillover goes up, the comparison of Firm๐ดโs profits remains unchanged. As for Firm ๐ต, when the levelof knowledge spillover stays at a low level, choosing oppor-tunistic behavior brings more benefits to Firm ๐ต in the game.However, as the level of knowledge spillover increases to acertain value, Firm ๐ต gets the highest profit from cooperationwith two reciprocal firms.
From Figure 1 we learn that the profits of Firm ๐ด gottenfrom reciprocal behavior are lower than the profits gainedfrom opportunistic behavior.The higher the level of spillover,the lower benefits Firm๐ด get from reciprocal behavior in thevertical R&D cooperation. From Figure 2 we can learn thatFirm ๐ต will get more benefits from its partnerโs reciprocalbehavior. Therefore, Firm ๐ด is more likely to choose oppor-tunistic behavior compared with Firm ๐ต. The vertical R&Dcooperation faces a higher probability of failure. As Figure 1shows, when the knowledge spillover stays at a low level, thedifferences among the profits of Firm ๐ด in four situationsare small. As the level of knowledge spillover increases, thedifferences among the profits of Firm ๐ด in four situationsgrow.Therefore, when the level of knowledge spillover is low,
Mathematical Problems in Engineering 7
Table 4: The profits of four situations in different levels of R&D effort costs.
๐พ ๐ฟ ๐๐ ๐
๐ด๐๐๐
๐ด๐๐ ๐
๐ด๐๐๐
๐ด๐๐ ๐
๐ต๐๐๐
๐ต๐๐ ๐
๐ต๐๐๐
๐ต
3.00 0.75 127.55 274.10 86.51 362.50 943.88 491.49 899.65 462.503.50 0.64 161.27 249.48 120.85 312.07 743.91 455.36 732.90 433.264.00 0.56 171.66 233.31 136.45 281.19 639.15 431.33 638.70 413.524.50 0.50 175.00 221.89 144.63 260.42 575.00 414.20 578.51 399.315.00 0.45 175.77 213.41 149.34 245.51 531.77 401.38 536.86 388.595.50 0.41 175.52 206.86 152.23 234.31 500.71 391.42 506.38 380.236.00 0.38 174.86 201.65 154.10 225.59 477.32 383.47 483.13 373.526.50 0.35 174.04 197.41 155.35 218.61 459.08 376.97 464.83 368.027.00 0.32 173.18 193.90 156.21 212.91 444.46 371.56 450.05 363.437.50 0.30 172.35 190.93 156.80 208.15 432.49 366.99 437.87 359.54
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00
RROO
ROOR
Figure 1: The profits of Firm ๐ด in different levels of spillovers.
0.00
200.00
400.00
600.00
800.00
1000.00
1200.00
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00
RROO
ROOR
Figure 2: The profits of Firm ๐ต in different levels of spillovers.
mechanisms such as punishment for opportunism may bemore effective to guarantee the stability of cooperation.
Second, in order to analyze the effects of R&D effort coston the two firmsโ profits in different situations, we assume thebasic parameters to be as follows:
๐ = 100,
๐๐ด= 30,
๐๐ต= 20,
๐ฝ = 0.5.
(32)
From Table 4 it can also be seen that the profits of Firm๐ดin the four situations satisfy ๐๐๐
๐ด> ๐๐๐
๐ด> ๐๐ ๐
๐ด> ๐๐ ๐
๐ด. As the
cost of R&D efforts goes up, the comparison of the Firm ๐ดโsprofits remains unchanged. As for Firm ๐ต, when the cost ofR&D efforts stays at a low level, choosing reciprocal behaviorbrings more benefits to Firm ๐ต in the game. However, as thecost of R&D efforts increases to a certain value, Firm ๐ต getshigher profits from cooperation with two reciprocal firms.
From Figure 1 we learn that the profits of Firm ๐ด gottenfrom reciprocal behavior are lower than those from oppor-tunistic behavior. But when the cost of R&D efforts increases,the profits of Firm ๐ด gotten from reciprocal behavior grow.From Figure 4 we can learn that Firm ๐ตwill get more benefitsfrom its partnerโs reciprocal behavior. But its profits decreasewith the cost rising. Figures 3 and 4 also indicate that Firm๐ด is more likely to choose opportunistic behavior comparedwith Firm๐ต.Moreover, when the cost of R&Defforts stays at ahigh level, the differences among the profits of Firm๐ด in foursituations are small.Therefore, when the cost of R&Defforts ishigh, mechanisms such as punishment for opportunism maybe more effective to guarantee the stability of cooperation.
5. Conclusion
As the R&D contract between firms is inherently incomplete,the opportunistic behavior could not be avoided, whichmakes the R&D cooperation unstable. Compared with thegame theoretical based literature on the stability of R&D
8 Mathematical Problems in Engineering
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50
RROO
ROOR
Figure 3:Theprofits of Firm๐ด in different levels of R&Deffort costs.
0.00 100.00 200.00 300.00 400.00 500.00 600.00 700.00 800.00 900.00
1000.00
3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50
RROO
ROOR
Figure 4:Theprofits of Firm๐ต in different levels of R&Deffort costs.
cooperation, we study the stability of vertical R&D cooper-ation. In this paper, we have provided a gamemodel with twofirms in the vertical R&D cooperation to discuss the stabilityof the cooperation. Two firms first build a partnership andthen coordinate their decisions of R&D efforts. However,due to the cooperative and competitive relationship betweenthe two collaborative firms, opportunism cannot be avoided,which makes the vertical R&D cooperation fail. We firstanalyze the profits of Firm ๐ด and Firm ๐ต in four differentsituations and then, respectively, compare the values ofpayoffs of Firm ๐ด and Firm ๐ต. Finally we discuss the effectsof spillover level and R&D cost on profits of four differentsituations, and numerical illustration is presented.
Our results suggest that the vertical R&D cooperationis inherently unstable, and the downstream firm is morelikely to break the agreement. When building a partnership,firms need to consider the social statue and reputation of itspartner and mutual trust between the two firms. This paperalso identifies the role of knowledge spillovers and the costof R&D efforts in the stability of vertical R&D cooperation.Knowledge flow and R&D cost influence the firmsโ payoffsin different situations. And they play different roles in
the decision process. We learn that when the level of knowl-edge spillover is low or the cost of R&D efforts is high,mechanisms such as punishment for opportunism may bemore effective.
These results may provide a theoretical basis for theoperation of vertical R&D cooperation.This paper also raisessome questions for future research. First, we note that ouranalysis concentrates on a simple supply chain with two firmsinvolved. In future work we hope to explore the stability ofvertical R&D cooperation in a more general setting. Second,empirical work can be done to better analyze the oppor-tunism problem in the vertical R&D cooperation. Third,other factors such as punishment and trust in the stable R&Dcooperation can be considered in future studies.
Appendix
(1) Derivation of the Comparison of ๐๐๐๐ด
and ๐๐ ๐ ๐ด. Consider
๐๐๐
๐ดโ ๐๐ ๐
๐ด=๐2(4 โ 0.5๐ฟ)
(8 โ 3๐ฟ)2โ๐2(4 โ 4.5๐ฟ)
(8 โ 6๐ฟ)2
=๐2
(8 โ 3๐ฟ)2(8 โ 6๐ฟ)
2[(4 โ 0.5๐ฟ) (8 โ 6๐ฟ)
2
โ (4 โ 4.5๐ฟ) (8 โ 3๐ฟ)2]
=๐2๐ฟ
(8 โ 3๐ฟ)2(8 โ 6๐ฟ)
2(22.5๐ฟ
2โ 60๐ฟ + 64) > 0.
(A.1)
Therefore, we can get ๐๐๐๐ด> ๐๐ ๐
๐ด.
(2) Derivation of the Comparison of ๐๐๐๐ต
and ๐๐๐ ๐ต
. Consider
๐๐๐
๐ตโ ๐๐๐
๐ต=๐2(8 โ 2๐ฟ)
(8 โ 3๐ฟ)2โ๐2(8 โ 4.5๐ฟ)
(8 โ 4๐ฟ)2
=๐2
(8 โ 3๐ฟ)2(8 โ 4๐ฟ)
2[(8 โ 2๐ฟ) (8 โ 4๐ฟ)
2
โ (8 โ 4.5๐ฟ) (8 โ 3๐ฟ)2]
=๐2
(8 โ 3๐ฟ)2(8 โ 4๐ฟ)
2(8.5๐ฟ2โ 32๐ฟ + 32) > 0.
(A.2)
Therefore, we can get ๐๐๐๐ต> ๐๐๐
๐ต.
(3) Derivation of the Comparison of ๐๐ ๐ ๐ต
and ๐๐๐๐ต
. Consider
๐๐ ๐
๐ตโ ๐๐๐
๐ต=๐2(8 โ 4.5๐ฟ)
(8 โ 6๐ฟ)2โ๐2(8 โ 2๐ฟ)
(8 โ 3๐ฟ)2
=๐2
(8 โ 3๐ฟ)2(8 โ 6๐ฟ)
2[(8 โ 4.5๐ฟ) (8 โ 3๐ฟ)
2
โ (8 โ 2๐ฟ) (8 โ 6๐ฟ)2]
=๐2๐ฟ
(8 โ 3๐ฟ)2(8 โ 6๐ฟ)
2(31.5๐ฟ
2โ 192๐ฟ + 224) .
(A.3)
Mathematical Problems in Engineering 9
The intersections of the quadratic function ๐ฆ = 31.5๐ฅ2 โ192๐ฅ + 224 with the ๐ฅ-axis are, respectively, ((192 โโ8640)/63, 0) and ((192 + โ8640)/63, 0). As 0 < ๐ฟ < 8/9,therefore, we can get ๐๐ ๐
๐ต> ๐๐๐
๐ต.
(4) Derivation of the Comparison of ๐๐ ๐ ๐ต
and ๐๐ ๐๐ต
. Consider
๐๐ ๐
๐ตโ ๐๐ ๐
๐ต=๐2(8 โ 4.5๐ฟ)
(8 โ 6๐ฟ)2โ๐2(8 โ 2๐ฟ)
(8 โ 5๐ฟ)2
=๐2
(8 โ 6๐ฟ)2(8 โ 5๐ฟ)
2[(8 โ 4.5๐ฟ) (8 โ 5๐ฟ)
2
โ (8 โ 2๐ฟ) (8 โ 6๐ฟ)2]
=๐2๐ฟ
(8 โ 3๐ฟ)2(8 โ 6๐ฟ)
2(โ40.5๐ฟ
2+ 80๐ฟ โ 32) .
(A.4)
The intersections of the quadratic function ๐ฆ = โ40.5๐ฟ2 +80๐ฟโ32with the ๐ฅ-axis are, respectively, ((80โโ1216)/81, 0)and ((80 + โ1216)/81, 0). As 0 < ๐ฟ < 8/9, therefore, when(80โโ1216)/81 < ๐ฟ < 8/9, we can get ๐๐ ๐
๐ต> ๐๐ ๐
๐ต, and, when
0 < ๐ฟ < (80 โ โ1216)/81, we can get ๐๐ ๐ ๐ต< ๐๐ ๐
๐ต.
Conflict of Interests
The authors declare that there is no conflict of interestsregarding the publication of this paper.
Acknowledgments
This work is supported by the National Science Foundationof China (no. 61502167), the Hunan Provincial EducationDepartment ScientificResearch FundofChina (no. 15C0825),Hunan Provincial Science and Technology Program Projectof China (no. 2015JC3066), Scientific Research Foundationfor Ph.D. Hunan Normal University (no. Math 120641), andYouth Scientific Research Fund of Hunan Normal University(no. 11301).
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