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Vertical integration and disruptive cross‐market R&D
Author(s) -
Lin Ping,
Zhang Tianle,
Zhou Wen
Publication year - 2019
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12328
Subject(s) - vertical integration , upstream (networking) , downstream (manufacturing) , incentive , industrial organization , monopoly , innovator , business , upstream and downstream (dna) , microeconomics , economics , marketing , computer science , telecommunications , finance , entrepreneurship
We study how vertical market structure affects the incentives of suppliers and customers to develop a new input that will enable the innovator to replace the incumbent supplier. In a vertical setting with an incumbent monopoly upstream supplier and two downstream firms, we show that vertical integration reduces the R&D incentives of the integrated parties, but increases that of the nonintegrated downstream rival. Strategic vertical integration may occur whereby the upstream incumbent integrates with a downstream firm to discourage or even preempt downstream disruptive R&D. Depending on the R&D costs, vertical integration may lower the social rate of innovation.