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Vertical Integration, Innovation and Foreclosure

  • 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)

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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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
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00544494/en/
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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 9308, Université du Québec à Montréal, Département des sciences économiques.
  2. Church, J. & Gandal, N., 1996. "Systems Competition, Vertical Merger and Foreclosure," Papers 6-96, Tel Aviv - the Sackler Institute of Economic Studies.
  3. 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.
  4. 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.
  5. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
  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.
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