Auctions; Game Theory; New Product Development; Research and Development
Should a firm, which seeks to subcontract a new product development project, leverage competition among potential suppliers and ask all of them to engage in research and development in parallel? Or should it first invite offers and commit to the supplier with the best offer, before only this supplier engages in development?Building on analytical literature on both formats, the authors apply game theory to answer these questions. The authors identify Bayesian Nash equilibrium strategies and characterize advantages of both formats.The authors find that having multiple suppliers engage in new product development in parallel is favored only if enough suppliers can be attracted, which is the case when development uncertainty and learning benefits are high.The participation decision also depends on the specific structure of the project's development costs. If administrative overhead and material costs are substantial, while engaging in development and exerting effort is relatively cheap but does not offer many learning opportunities, the number of suppliers who would be willing to engage in parallel development is limited. First inviting offers and selecting the best supplier to exclusively engage in new product development then becomes more attractive for the buyer.The authors discuss further implications and characterize environments that may foster more innovativeness in this context.