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The U-Shaped relationship between vertical integration and competition: theory and evidence

Aghion, P.; Griffith, R.; Howitt, P.; (2006) The U-Shaped relationship between vertical integration and competition: theory and evidence. (IFS Working Papers W06/12). Institute for Fiscal Studies: London, UK. Green open access

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Abstract

This paper considers how competition can affect aggregate innovative activity through its effects on firms' decision whether or not to vertically integrate. A moderate increase in competition enhances innovation incentives, too much competition discourages innovative effort. These effects generates an inverted-U relationship between competition and innovation and between competition and the incentive to vertically integrate. Preliminary evidence finds that there is a non-linear relationship between competition and the propensity of firms to vertically integrate. These results seem to be more consistent with the Property Right Theory (PRT) of vertical integration than with the Transaction Cost Economics (TCE) approach.

Type: Working / discussion paper
Title: The U-Shaped relationship between vertical integration and competition: theory and evidence
Open access status: An open access version is available from UCL Discovery
Publisher version: http://dx.doi.org/10.1920/wp.ifs.2006.0612
Language: English
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/2686
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