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Vertical Integration, Innovation and Foreclosure

Author

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  • Marie-Laure Allain

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

  • Claire Chambolle

    (Department of Economics, Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique, ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique)

  • Patrick Rey

    (TSE - 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.

Suggested Citation

  • Marie-Laure Allain & Claire Chambolle & Patrick Rey, 2010. "Vertical Integration, Innovation and Foreclosure," Working Papers hal-00544494, HAL.
  • Handle: RePEc:hal:wpaper:hal-00544494
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00544494
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    References listed on IDEAS

    as
    1. 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.
    2. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
    3. 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.
    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)

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    Cited by:

    1. repec:eee:indorg:v:55:y:2017:i:c:p:25-57 is not listed on IDEAS
    2. 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.
    3. Liu, Xingyi, 2016. "Vertical integration and innovation," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 88-120.
    4. Miklós-Thal, Jeanine & Rey, Patrick & Vergé, Thibaud, 2010. "Vertical relations," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 345-349, July.
    5. Hunold, Matthias & Röller, Lars-Hendrik & Stahl, Konrad, 2012. "Backwards Integration and Strategic Delegation," CEPR Discussion Papers 8910, C.E.P.R. Discussion Papers.
    6. Spiegel, Yossi, 2013. "Backward integration, forward integration, and vertical foreclosure," CEPR Discussion Papers 9617, C.E.P.R. Discussion Papers.
    7. 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.
    8. Hunold, Matthias, 2017. "Backward ownership, uniform pricing and entry deterrence," DICE Discussion Papers 250, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    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.; 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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