Vertical integration, innovation and foreclosure with competing ecosystems

Michele Bisceglia, Jorge Padilla, Salvatore Piccolo and Shiva Shekhar

Information Economics and Policy, 2022, vol. 60, issue C

Abstract: We study the competitive effects of a vertical merger in a digital industry where an integrated incumbent (closed ecosystem) competes with an open ecosystem formed by an upstream supplier (ecosystem gatekeeper) and two downstream retailers selling differentiated products. Absent innovation, the incumbent sells a superior product compared to the rivals’ ones. Yet, the gatekeeper of the open ecosystem can fill up this gap by engaging in product innovation. We investigate the impact of vertical integration on the gatekeeper’s incentives to foreclose its non-integrated downstream unit and innovate its ecosystem to compete head-to-head with the incumbent. The vertically integrated gatekeeper raises the costs of the unintegrated competitor to relax intra-ecosystem competition but does not fully foreclose it as that would cause fiercer inter-ecosystem competition. Moreover, vertical integration enhances innovation within the open ecosystem, enabling its participants to catch up with the incumbent. Overall, vertical integration may benefit consumers even when it softens intra-ecosystem competition.

Keywords: Competing ecosystems; Foreclosure; Innovation; Vertical mergers (search for similar items in EconPapers)
JEL-codes: L13 L23 L42 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:iepoli:v:60:y:2022:i:c:s0167624522000208

DOI: 10.1016/j.infoecopol.2022.100981

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