Vertical integration, innovation and foreclosure with competing ecosystems

Michele Bisceglia, Jorge Padilla, Salvatore Piccolo and Shiva Shekhar
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Michele Bisceglia: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Jorge Padilla: UniBg - Università degli Studi di Bergamo = University of Bergamo
Salvatore Piccolo: UniBg - Università degli Studi di Bergamo = University of Bergamo, CSEF - Centre of Studies in Economics and Finance - UNISA - Università degli Studi di Salerno = University of Salerno
Shiva Shekhar: Compass Lexecon, University of Passau

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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)
Date: 2022-09
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Published in Information Economics and Policy, 2022, 60, pp.100981. ⟨10.1016/j.infoecopol.2022.100981⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04931197

DOI: 10.1016/j.infoecopol.2022.100981

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