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Vertical Integration, Innovation and Foreclosure

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  • Marie-Laure Allain

    (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Claire Chambolle

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ALISS - Alimentation et sciences sociales - INRA : UR1303)

  • Patrick Rey

    (Toulouse School of Economics - Toulouse School of Economics)

Abstract

This paper studies the potential effects of vertical integration on downstream firms' incentives to innovate. Interacting efficiently with a supplier may require information exchanges, which raises the concern that sensitive information may be disclosed to rivals. This may be particularly harmful in case of innovative activities, as it increases the risk of imitation. We show that vertical integration exacerbates this threat of imitation, which de facto degrades the integrated supplier's ability to interact with unintegrated competitors. Vertical integration may thus lead to input foreclosure, thereby raising rivals' cost and limiting both upstream competition and downstream innovation. A similar concern of customer foreclosure arises in the case of downstream bottlenecks.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00544494.

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Date of creation: 08 Dec 2010
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Handle: RePEc:hal:wpaper:hal-00544494

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Related research

Keywords: Vertical Integration; Foreclosure; Innovation; Imitation; Firewall.;

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References

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  1. Gérard Gaudet & Ngo Van Long, 1993. "Vertical Integration, Foreclosure and Profits in the Presence of Double Marginalisation," Cahiers de recherche du Département des sciences économiques, UQAM, Université du Québec à Montréal, Département des sciences économiques 9308, Université du Québec à Montréal, Département des sciences économiques.
  2. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
  3. Sudipto Bhattacharya & Sergei Guriev, 2004. "Patents vs Trade Secrets: Knowledge Licensing and Spillover," Working Papers w0064, Center for Economic and Financial Research (CEFIR), revised Feb 2006.
  4. Yongmin Chen & Michael H. Riordan, 2007. "Vertical integration, exclusive dealing, and expost cartelization," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 1-21, 03.
  5. Milliou, Chrysovalantou, 2004. "Vertical integration and R&D information flow: is there a need for 'firewalls'?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(1), pages 25-43, January.
  6. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 9(1), pages 25-51, 03.
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Cited by:
  1. Charles Thomas, 2011. "The Price Effects of Using Firewalls as an Antitrust Remedy," Review of Industrial Organization, Springer, Springer, vol. 38(2), pages 209-222, March.

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