ON VERTICAL INTEGRATION INTO RESEARCH-AND-DEVELOPMENT

Using a general probability distribution of innovation, this article analyzes a firm's incentives to integrate vertically into research. We find that, with one-shot innovation, investment in R&D increases with rewards from innovation and decreases with competition. However, under certain conditions these plausible results are reversed. Specifically, if innovation is sufficiently delayed, higher innovation profits might even lead to lower R&D investment. Also, if the firm has a sufficiently large initial R&D investment, it might increase its R&D investment in the face of greater rival R&D.