Vertical integration and disruptive cross‐market R&D. Issue 1 (9th August 2019)

• Record Type: Journal Article
• Authors: Lin, Ping; Zhang, Tianle; Zhou, Wen
• Is Part Of: Journal of economics & management strategy. Volume 29:Issue 1(2020)
• Page Start: 51
• Page End: 73
• Publication Date: 2019-08-09
• Subjects: innovation -- replacement effect -- structural change -- vertical integration; Economics -- Periodicals; Business -- Periodicals; Management -- Periodicals; Strategic planning -- Periodicals; 330.1
• DOI: 10.1111/jems.12328
• Languages: English
• ISSNs: 1058-6407

Abstract

Abstract: 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.