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

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.

Identification in ascending auctions, with an application to digital rights management

“…Sinkinson (2020) and Zhu, Liu, and Chintagunta (2015) examined exclusive contracting deals between Apple and AT&T. Fan and Yang (2020) provided a broad study of the welfare effects of product proliferation and competition in the smartphone industry. Kehoe, Larsen, and Pastorino (2020) analyzed dynamic price competition between Apple and Samsung in tablet and smartphone markets, and Yang (2020) analyzed vertical structure and innovation in these markets.…”

Innovation: Market Failures and Public Policies

“…Dynamic incentive to preempt competition causes innovation incentives to increase steeply as we move from one to three or more competitors. Yang (2020) studies the incentives to innovate in a vertical relationship, such as System-on-a-Chip vendors selling technology to cell phone manufacturers. Empirically, the benefits of a hypothetical merger between Qualcomm and a smartphone manufacturer, who can then coordinate R&D incentives and reduce double marginalization, exceed the harms from foreclosing entry or increasing costs for other smartphone makers.…”

Product market competition, creative destruction and innovation

“…14 Our review is partial by necessity and we leave out many good papers. For example, Yang (2020) studies the incentives to innovate in a vertical relationship, such as System-on-a-Chip vendors selling technology to cell phone manufacturers. Empirically, the benefits of a hypothetical merger between Qualcomm and a smartphone Goettler and Gordon (2011) estimate a dynamic oligopoly game of the PC micro-processing industry where there was competition between leader INTEL and AMD over several decades.…”