A Bounded Commitment in Vertical Collaborations of New Product Development

Uncertainty is a main source of opportunistic behaviors in research and development cooperations, which challenges strategic decisions ranging from investments to operations. To avoid opportunism arising in cooperations, commitments (either formal contracts or informal communications) are generally made in advance by members of an alliance. However, how does a commitment encourage R&D investments and ultimately enhance the total performance, without loss of flexibility in ex post operations? This study attempts to answer this by investigating a bounded commitment in the context of vertical collaborations in a supply chain. In this exploratory study, a 3-stage game model is used (by backward induction) to examine a two-echelon supply chain under a bounded commitment in NPD. Our analysis shows that upstream R&D investment is stimulated more and that both members are better off under the bounded commitment. At the same time, when the relative bargaining power between the supplier and the manufacturer falls into an appropriate area, it is possible to reach a bounded commitment, and the manufacturer is more sensitive to this relationship. Finally, the bounded commitment restrains opportunistic behaviors, but there is no strong sign that an increase in the ratio of the order outside the chain to the inside one can make firms better.