Vertical Integration and R&D Infort-Nation Flow: Is There a Need for 'Firewalls'?

Abstract

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. (C) 2003 Elsevier B.V. All rights reserved.