Vertical structure and innovation: A study of the SoC and smartphone industries
Corresponding Author
Chenyu Yang
Department of Economics, University of Maryland, College Park
Search for more papers by this authorCorresponding Author
Chenyu Yang
Department of Economics, University of Maryland, College Park
Search for more papers by this authorI would like to acknowledge the generous financial support provided by Rackham Graduate School and Michigan Institute for Teaching and Research in Economics (MITRE) at the University of Michigan. I am grateful for the guidance and support from my advisers Jeremy Fox, Daniel Ackerberg, Ying Fan and Srinivasaraghavan Sriram. I would like to thank Danial Asmat, Will Strauss and Will Peichun Wang for insight into the mobile phone industry. I benefited greatly from the comments of many seminar participants, two anonymous referees and the editor Marc Rysman. All errors are mine.
Abstract
This article studies how vertical integration and upstream R&D subsidy affect innovation and welfare in vertically separated industries. I formulate a dynamic structural model of a dominant upstream firm and oligopolistic downstream firms that invest in complementary innovations. I estimate the model using data on the System-on-Chip (SoC) and smartphone industries. The results suggest that a vertical merger can increase innovation and welfare, mainly driven by the investment coordination of the merged firms. I also find that subsidizing the upstream innovation increases overall private investment, innovation, and welfare.
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