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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.
Authors
![Rachel Cassidy](/sites/default/files/styles/square_desktop/public/2022-08/Rachel_Griffith.jpg?itok=YovGgLq9)
CPP Co-Director, IFS Research Director
Rachel is Research Director and Professor at the University of Manchester. She was made a Dame for services to economic policy and education in 2021.
![Philippe Aghion](/sites/default/files/styles/square_desktop/public/2022-06/Philippe_Aghion.jpg?itok=5T5iMNaV)
Research Fellow London School of Economics
Philippe is an IFS Research Fellow, a Professor of Economics at LSE, at the College de France and at INSEAD, and a Fellow at the Econometric Society.
![Person graphic](/sites/default/files/styles/square_desktop/public/2022-06/IFS-person-graphic.png?itok=hWCtTSrz)
Peter Howitt
Working Paper details
- DOI
- 10.1920/wp.ifs.2006.0612
- Publisher
- IFS
Suggested citation
P, Aghion and R, Griffith and P, Howitt. (2006). The U-shaped relationship between vertical integration and competition: theory and evidence. London: IFS. Available at: https://ifs.org.uk/publications/u-shaped-relationship-between-vertical-integration-and-competition-theory-and-evidence (accessed: 30 June 2024).
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