"Vertical integration and R&D informaiton flow: is there a need for `firewalls'?
JEL codes: L22, L11, L49, K21
Keywords: vertical integration, information flow, R&D spillovers
We examine the impact of R&D information flow on
innovation incentives and welfare. In particular, we consider the case in which
the information flows from a downstream nonintegrated firm to the downstream
division of a vertically integrated firm via its upstream subsidiary. In a
setting where both the integrated and nonintegrated firm engage in
cost-reducing R&D and compete in the product market, we show that the
impact of the R&D information flow on innovation, output, and profits is
positive for the integrated firm, and negative for the nonintegrated firm.
Unless information spillovers are high, goods are close substitutes, and
R&D is very costly, ‘firewalls’ decrease welfare.
Pre-publication pdf copy.