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Vertical integration and disruptive cross‐market R&D

Ping Lin, Tianle Zhang () and Wen Zhou

Journal of Economics & Management Strategy, 2020, vol. 29, issue 1, 51-73

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.

Date: 2020
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https://doi.org/10.1111/jems.12328

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Working Paper: Vertical Integration and Disruptive Cross-Market R&D (2017) Downloads
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