Vertical Integration and Disruptive Cross-Market R&D

Lin, Ping and Zhang, Tianle and Zhou, Wen (2017): Vertical Integration and Disruptive Cross-Market R&D.

Abstract

We study incentives for innovations that enable firms to enter backward into the input market. Such innovations are disruptive in that they lead to structural changes and even reversal of supply-customer relationships. We first show that Arrow's replacement effect is also present in our vertical setting which gives rise to two general results: (1) vertical integration lowers the R&D incentive of the integrated downstream firm; and (2) vertical integration raises the R&D incentive of the non-integrated downstream firm. We then identify, respectively, situations for strategic integration, which is driven by the motive to preempt R&D of the target firm, and for strategic separation, which occurs as a means to not trigger R&D by the downstream rival. An otherwise profitable raising rival's cost strategy may not be chosen for fear of counterattack by the rival in the form of disruptive R&D.

• Item Type: MPRA Paper
• Language: English
• Keywords: innovation, structural change, replacement effect.
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L4 - Antitrust Issues and Policies > L42 - Vertical Restraints ; Resale Price Maintenance ; Quantity Discounts; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

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