Innovation, investment, and pricing in digital supply chains

Digital supply chains are composed of firms and industries involved in the creation and delivery of Internet content for various uses by the end-consumers. An important portion of the Internet content is served over the World Wide Web (WWW). They form the most important medium for innovative services since the beginning of the century, e.g., online banking, e-commerce, education, entertainment, and media, etc. We study digital supply chains and the problem of web content delivery from operational, industrial organization, and computer science perspectives to understand their growth potential. We focus on the interaction between content delivery networks and content providers as upstream and downstream firms respectively, to explain the product innovation activities at these two different tiers in relation to each other. We pose a theory of technology creation and diffusion in supply chains - from upper tiers to lower tiers - that is applicable to both digital supply chains and to any other supply chain.;Motivated by the online content delivery industry, we investigate the following questions for technology creation and diffusion in any supply chain: How and when can an upstream technology leader encourage its customers to invest in their products, while still being able to recoup the benefits of doing so? Under what conditions is there a competitive advantage from early technology leadership? We investigate these questions in a two-tier supply chain with a duopoly in the upper tier, and a set of downstream firms whose products are limited by the upstream technology. We establish the optimal pricing and innovation investment policy for a leader, and the equilibrium investments of its downstream customers. We define a new measure, "vertical potential" for downstream industries, which summarizes downstream demand and technological opportunity conditions. We show that high-potential downstream industries form the technological frontier, which plays a crucial role in the diffusion of upstream technology into final goods, and solving the problem of under-investment in innovation. We also demonstrate that the same measure determines whether early upstream technology leadership translates into competitive advantage. Then, we study the dynamics of interaction between an upstream technology leader and a downstream firm over time under changing industry conditions for both tiers.;An important portion of the innovations takes place in industries which do not face end-consumers directly. There usually is a long chain of industry tiers between basic research and consumer markets. The resulting supply chains are usually dense, i.e., an upstream technology is used by multiple downstream industries. Technology push and demand pull influence innovative activities through the interaction of firms and industries at different tiers. These interactions are shaped by technology coupling constraints (product complementarities) between tiers, uncertainties in the success of R&D and demand responses to quality, and changing technological and demand opportunities at different tiers and industries. In this thesis we introduce such a supply-chain perspective to the problem of innovation dynamics to uncover how interactions between firms and industries under competition may explain the level of their innovative activities.