Could Vertical Integration Increase Innovation?

This paper studies the effects of vertical integration on innovation in the chipset and smartphone industries. I formulate and estimate a dynamic structural model of the upstream chipset maker Qualcomm and downstream smartphone handset makers. The two sides make dynamic investment decisions and negotiate chipset prices via Nash bargaining. Using the estimates, I simulate market outcomes should Qualcomm merge with a downstream handset maker. I find that the vertical merger would increase innovation rates and social welfare, driven primarily by the investment coordination of the two merged firms.