Inter-industry R&D-spillovers between vertically related industries: incentives, strategic aspects and consequences

In this paper we analyse the consequences of strategically generated R&D-spillovers in vertically related markets. Suppliers may be innovative for their customers even if no markets for information exist. Inter-industry R&D-spillovers enhance individual and effective R&D-investments of downstream-firms, increase their output and their factor demand. We extend the framework of D´Aspremont and Jacquemin (1988) to a two-market-model and show that the incentives for the spillover strategy decrease in the number of upstream-firms. In dependence of the level of intra-industry R&D-spillovers, inter-industry R&D-spillovers may cause effective R&D of customers to rise if the number of downstream-firms increases. Even if inter-industry R&D-spillovers only reduce production costs of downstream-firms, firm profits on both markets as well as consumer surplus increase. In the endogeneously determined structure of downstream-market more customers enter the market if suppliers take innovative activities for their customers