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Vertical integration, knowledge disclosure and decreasing rival's cost

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  • Chrysovalantou Milliou

    ()

  • Emmanuel Petrakis

    ()

Abstract

We study vertical integration incorporating the fact that it creates the possibility of knowledge disclosure. We consider a setting where, through integrating, an upstream monopolist learns its downstream partner’s innovation, and can disclose it to its downstream rival. We show that a vertically integrated firm chooses to fully disclose its knowledge to its downstream rival. Knowledge disclosure intensifies downstream competition but, at the same time, expands the downstream market size. We also show that, due to knowledge disclosure, vertical integration increases firms’ innovation incentives, consumer and total welfare, and decreases, instead of raises, the rival’s cost.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1213.

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Date of creation: Apr 2012
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Handle: RePEc:cte:werepe:we1213

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Keywords: Vertical integration; R&D investments; Market floreclosure; Knowledge disclosure;

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References

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  1. Sacco, Dario & Schmutzler, Armin, 2011. "Is there a U-shaped relation between competition and investment?," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 65-73, January.
  2. Allain, Marie-Laure & Chambolle, Claire & Rey, Patrick, 2011. "Vertical Integration, Information and Foreclosure," TSE Working Papers 11-237, Toulouse School of Economics (TSE), revised Nov 2011.
  3. Keilbach, Max & Bönte, Werner, 2004. "Concubinage or Marriage? Informal and Formal Cooperations for Innovation," ZEW Discussion Papers 04-11, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Joshua Gans & Catherine de Fontenay, 2004. "Vertical Integration in the Presence of Upstream Competition," Econometric Society 2004 North American Winter Meetings 7, Econometric Society.
  5. Harhoff, Dietmar & Henkel, Joachim & von Hippel, Eric, 2003. "Profiting from voluntary information spillovers: how users benefit by freely revealing their innovations," Research Policy, Elsevier, vol. 32(10), pages 1753-1769, December.
  6. Milliou, Chrysovalantou, 2004. "Vertical integration and R&D information flow: is there a need for 'firewalls'?," International Journal of Industrial Organization, Elsevier, vol. 22(1), pages 25-43, January.
  7. Chrysovalantou Milliou, 2009. "Endogenous protection of R&D investments," Canadian Journal of Economics, Canadian Economics Association, vol. 42(1), pages 184-205, February.
  8. Anil Arya & Brian Mittendorf, 2006. "Enhancing Vertical Efficiency Through Horizontal Licensing," Journal of Regulatory Economics, Springer, vol. 29(3), pages 333-342, 05.
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