Abstract
This paper studies the effects of vertical integration on innovation in the chipset and smartphone industries. I formulate and estimate a dynamic structural model of a dominant upstream chipset maker and downstream smartphone handset makers. The two sides make dynamic investment decisions and negotiate chipset prices via Nash bargaining. Using the estimates, I simulate market outcomes should the upstream firm merge with a downstream firm. I find that the vertical merger would increase innovation rates and social welfare, driven primarily by the investment coordination of the two merged firms.
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