Vertical Integration and Disruptive Cross‐Market R&D

23 Pages Posted: 28 May 2020

See all articles by Ping Lin

Ping Lin

Lingnan University - Department of Economics

Tianle Zhang

Lingnan University

Wen Zhou

University of Hong Kong

Date Written: Spring 2020

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.

Keywords: innovation, replacement effect, structural change, vertical integration

Suggested Citation

Lin, Ping and Zhang, Tianle and Zhou, Wen, Vertical Integration and Disruptive Cross‐Market R&D (Spring 2020). Journal of Economics & Management Strategy, Vol. 29, Issue 1, pp. 51-73, 2020, Available at SSRN: https://ssrn.com/abstract=3607411 or http://dx.doi.org/10.1111/jems.12328

Ping Lin (Contact Author)

Lingnan University - Department of Economics ( email )

135 Xingang Xi Road
Tuen Mun
Guangzhou, Guangzhou 510275
China
(852)2616 7203 (Phone)
(852)2891 7940 (Fax)

Tianle Zhang

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Wen Zhou

University of Hong Kong ( email )

1225 KKL Building
Pokfulam Road
Hong Kong
China

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