Tuesday, January 26, 2016
Chrysovalantou Miliou (Department of Economics, Universidad Carlos III de Madrid) and Emmanuel Petrakis (Department of Economics, University of Crete, Greece) ponder Vertical Integration, Knowledge Disclosure and Decreasing Rival's Cost.
ABSTRACT: We study vertical integration taking into account the fact that, by facilitating the exchange of information within the integrated firm, it allows its upstream unit to disclose to the non-integrated downstream customer-rival the knowledge that it acquires regarding its downstream partner's innovation. We show that a vertically integrated firm chooses to disclose its knowledge to its downstream rival. Knowledge disclosure intensifies downstream competition but, at the same time, expands the size of the downstream market. We also show that, due to knowledge disclosure, vertical integration increases firms' innovation incentives, consumer and total welfare, and decreases, instead of raises, the rival's cost.