Vertical integration and innovation

Research output: Contribution to journalArticle

Abstract

Innovation is a driving force for most industries, where it moreover affects many stages of the vertical chain. We study the impact of vertical integration on innovation in an industry where firms need to undertake risky R&D investments at both production and distribution stages. Vertical integration brings better coordination within the integrated firm, which boosts its investment incentive at both upstream and downstream levels. However, it is only mutually beneficial for firms to integrate when both upstream and downstream innovations are important. When innovation is irrelevant at one level, firms favor instead vertical separation. The analysis provides insights for the wave of mergers and R&D outsourcing observed in the pharmaceutical industry and other vertically related industries.
Original languageEnglish
Pages (from-to) 88-120
JournalInternational Journal of Industrial Organization
Volume47
Early online date10 May 2016
DOIs
Publication statusPublished - 1 Jul 2016

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