Wednesday, January 19, 2011
Posted by D. Daniel Sokol
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), and Patrick Rey (Toulouse School of Economics - Toulouse School of Economics) explore Vertical Integration, Innovation and Foreclosure.
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.