The Impact of Decision Rights and Long Term Relationships on Innovation Sharing

While sharing the innovation between a buyer and a supplier can increase the efficiency and total profit of the supply chain, many suppliers are reluctant to do so. Sharing innovations leaves the supplier in a vulnerable position if the buyer exploits the information (e.g. by re-sharing the supplier’s innovation with competing suppliers). In this paper, we examine conditions under which a collaborative relationship can arise in this situation, with a supplier voluntarily sharing an innovation and a buyer repays that trust by sharing the surplus increase rather than seeking competing bids from suppliers. First we show, both theoretically and experimentally, that decisions to collaborate are affected by the length of the relationship between the firms – longer relationships lead to higher collaboration and higher total profits. We additionally show that the collaborative relationship depends not just on the firm-level relationship length, but also on the longor short-run focus of the employees within the firm that make decisions. We model the buyer as a dual decision maker, with long-run and/or short-run focused employees (“engineers” and “procurement managers”) determining the buyer’s actions. We characterize the equilibrium of this model and show that collaborative outcomes depend on the level of control the long-run employee has within the buyer. Our experimental results verify this intuition. Collaborative relationships occur more often when the engineer has more control. However, the supplier’s decision to share innovation depends primarily on the firm-level relationship length, while the buyer’s decision to seek competition depends more on the relationship focus of the controlling employees. Consequently, buyer’s profits increase with long-run firm relationships (for any decision maker), while the supplier profits only significantly increase with a long-run decision maker. Finally, while theoretically suppliers and engineers should ignore the actions of the previous procurement managers, we find that both suppliers’ and engineers’ actions are correlated with the previous procurement managers’ decision.