The Impact of vertical R&D cooperation on market performance of firms

Objective: The aim of this article is to investigate the impact of vertical R&D cooperation on market performance of firms. Specifically, we explore the impact of vertical R&D cooperation on firms’ process innovation, outputs, market prices, and economic profits. Research Design & Methods: We apply microeconomic methods of analysis, i.e., mathematical modelling and optimisation procedures. We perform a comparative static analysis of two selected patterns of R&D in a supply chain, i.e. independent behaviour of firms and behaviour of firms in a vertically integrated industry. Findings: Vertical integration leads to significantly higher individual R&D investments. For all values of knowledge spillovers, consumer surplus and social welfare are higher under vertical integration compared with the independent behaviour of firms. Under independent behaviour, profit of the supplier is significantly larger compared with the vertical integration. The profit of the final-good manufacturer is significantly lower under independent behaviour compared with the vertically integrated industry. Implications & Recommendations: In regard to business and public policy implications, the large knowledge spillovers promote consumer surplus and social welfare in the vertically integrated industry, while small knowledge spillovers promote process innovations in the vertically integrated industry. Contribution & Value Added: Firms’ process innovation benefits from the vertical integration of the industry. Moreover, the greatest benefits from vertical integration for consumers and social welfare come from the largest knowledge spillovers in the industry.