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Vertical Integration Smooths Innovation Diffusion

Author

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  • Filippini Luigi

    (Università Cattolica del Sacro Cuore, Largo Gemelli 1Milano, Italy)

  • Vergari Cecilia

    (University of Bologna, Department of Economics, Piazza Scaravilli 2Bologna, Italy)

Abstract

Does vertical integration of an input innovator with a downstream firm entail innovation foreclosure? We study the licensing incentives of an independent input producer owning a patented product innovation which allows the downstream firms to improve the quality of their final goods. We consider two-part tariff contracts for both outside and incumbent innovators. We find that the incumbent innovator has always the incentive to license its innovation to the rival firm so that under vertical integration complete technology diffusion takes place. In contrast, the external patent holder may prefer exclusive licensing depending on the innovation size as well as on the set of allowed contracts. As a result vertical integration does not entail innovation foreclosure, rather it facilitates innovation diffusion with respect to vertical separation. As for the profitability, the vertical integration with either downstream firm is always privately profitable and it is welfare improving for large innovations: this implies that not all profitable mergers should be rejected.

Suggested Citation

  • Filippini Luigi & Vergari Cecilia, 2017. "Vertical Integration Smooths Innovation Diffusion," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(3), pages 1-22, July.
    • Handle: RePEc:bpj:bejeap:v:17:y:2017:i:3:p:22:n:3
    DOI: 10.1515/bejeap-2016-0126
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    References listed on IDEAS

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    Cited by:

    1. Xingtang Wang & Leonard F. S. Wang, 2022. "Indirect taxation, quality choice, and social welfare," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1764-1772, September.
    2. Montinaro, Marta & Scrimitore, Marcella, 2019. "Per unit and ad valorem royalties in a patent licensing game," MPRA Paper 96642, University Library of Munich, Germany.
    3. Cecilia Vergari & Luigi Filippini, 2023. "Innovation Diffusion and Strategic Outside Option in a Bargaining Game," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 63(1), pages 41-71, August.
    4. Xingtang Wang & Leonard F. S. Wang, 2022. "Corporate social responsibility, vertical product differentiation, and privatization policy," The Japanese Economic Review, Springer, vol. 73(2), pages 403-425, April.

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    More about this item

    Keywords

    negative royalties; patent licensing; product innovation; two-part tariff; vertical differentiation; vertical integration;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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