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Vertical Integration, Innovation and Foreclosure

Author

Listed:
  • Marie-Laure Allain

    (Ecole Polytechnique, CREST)

  • Claire Chambolle

    (INRA)

  • Patrick Rey

    (TSE)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Marie-Laure Allain & Claire Chambolle & Patrick Rey, 2011. "Vertical Integration, Innovation and Foreclosure," Working Papers 2011-17, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2011-17
    as

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    References listed on IDEAS

    as
    1. Sudipto Bhattacharya & Sergei Guriev, 2006. "Patents vs. Trade Secrets: Knowledge Licensing and Spillover," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1112-1147, December.
    2. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 25-51, March.
    3. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
    4. Géarard Gaudet & Ngo Long, 1996. "Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 409-432, September.
    5. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Spiegel, Yossi, 2013. "Backward integration, forward integration, and vertical foreclosure," CEPR Discussion Papers 9617, C.E.P.R. Discussion Papers.
    2. repec:eee:indorg:v:55:y:2017:i:c:p:25-57 is not listed on IDEAS
    3. Allain, Marie-Laure & Chambolle, Claire & Rey, Patrick, 2011. "Vertical Integration, Information and Foreclosure," IDEI Working Papers 673, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2011.
    4. Marie-Laure Allain & Claire Chambolle & Patrick Rey, 2016. "Vertical Integration as a Source of Hold-up," Review of Economic Studies, Oxford University Press, vol. 83(1), pages 1-25.
    5. Hunold, Matthias, 2017. "Backward ownership, uniform pricing and entry deterrence," DICE Discussion Papers 250, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. Liu, Xingyi, 2016. "Vertical integration and innovation," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 88-120.
    7. Miklós-Thal, Jeanine & Rey, Patrick & Vergé, Thibaud, 2010. "Vertical relations," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 345-349, July.
    8. Hunold, Matthias & Röller, Lars-Hendrik & Stahl, Konrad, 2012. "Backwards Integration and Strategic Delegation," CEPR Discussion Papers 8910, C.E.P.R. Discussion Papers.
    9. Charles Thomas, 2011. "The Price Effects of Using Firewalls as an Antitrust Remedy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 209-222, March.
    10. Chenyu Yang, 2017. "Could Vertical Integration Increase Innovation?," 2017 Meeting Papers 908, Society for Economic Dynamics.

    More about this item

    Keywords

    vertical integration; foreclosure; innovation; imitation; firewall;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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