Impact of vertical structure on downstream innovation incentives of product quality

This paper establishes a vertical structure with an upstream monopoly and two downstream duopolies.Downstream firms compete in quantity and their products are vertically differentiated.Such a model is structured to examine the impact of vertical structures on downstream innovation incentives.This study shows that the upstream monopoly will implement a discrimination price.Quality improvements of downstream firms are reciprocally inhibited under vertical separation.Under vertical integration,the quality improvement of the competitive firm will depress the integrated firm's innovating.On the contrary,the quality improvement of the integrated firm will enhance the innovation of the competitive firm.Compared with vertical separation,vertical integration accelerates downstream innovation of the integrated firm but decelerates the innovation of the competitive firms.