Title: Encouraging Suppliers to Process Innovations: A Game Theory Approach

Authors: Toni Jarimo, Urho Pulkkinen and Ahti Salo

Status: International Journal of Technology Intelligence and Planning, Vol. 1, No. 4, 2005, pp. 403-423.

Keywords: Innovation, network, incentive, game theory, profit sharing, demand supply chain management

This paper studies the design of process-innovation incentives in supplier networks. A real-life case study from the boat-building industry is presented to illustrate the importance of explicitly encouraging suppliers to continuous improvement. Motivated by the case study, we constructed a game theory model trying to capture the possible conflicting interests of different parties in a company network. Using our model, we applied three different bargaining rules in order to determine ex-ante profit-sharing principles that award process-innovations. The aim of profit sharing is that the efficiency-improving arrangements can be implemented so that none of the network companies has to incur losses. Consequently, if the profit-sharing principles are ex-ante contracted, then the network companies have the incentive to innovate.