Volume 51, Issue 3 p. 739-785
Original Article

Vertical structure and innovation: A study of the SoC and smartphone industries

Chenyu Yang

Corresponding Author

Chenyu Yang

Department of Economics, University of Maryland, College Park

cyang111@umd.edu

Search for more papers by this author
First published: 17 August 2020
Citations: 16

I 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.

The full text of this article hosted at iucr.org is unavailable due to technical difficulties.