Action-dependent commitment in vertical collaborations: The effect of demand-creating innovations in a supply chain

The recent adoption of Internet-based technologies has boosted collaborative innovation between business partners, among which strategic commitments (e.g., informal communications and formal contracts) are often employed to cope with high uncertainty. Can such commitments reduce uncertainty and are they profitable for firms? Do penalties impede opportunistic behavior? We answer these questions by investigating action-dependent commitment, defined here as when all commitments are made in a certain sequence, in the context of collaborative innovation in a supply chain. Modeling a multi-stage game among the members of an alliance, we analyze firms’ ex-ante commitments and ex-post opportunistic behavior in R&D and production. First, we find that an action-dependent commitment can reduce the negative effects of uncertainty because it enhances both members’ efforts and profits in the sense of expectations as well as supply chain performance. In particular, the supplier is more incentivized to invest in R&D. Second, opportunistic behavior may be restrained to a certain extent, but not absolutely. Third, keeping the supplier's outside orders below a certain level can help firms maintain the stability of the alliance. In practice, managers could adopt to make an action-dependent commitment to encourage collaborative R&D efforts. Moreover, the existence of opportunism, even with a maximal punishment, implies that they must be prepared to exercise caution in certain extreme cases. Finally, managers must recognize who is the chain's leader for only such leaders who act first will get more and are willing to invest more.