Comparative Analysis of Cost Sharing and Vertical Integration between Upsteam Firms and Downstream Firms

This paper studies the cost sharing of cooperation RD between upsteam firms and downstream firms.Unlike the information sharing of horizontal cooperation,the basic form of vertical cooperation is cost sharing.For a simple market structure that includes of two downstream enterprises and a monopoly upstream enterprise,downstream firms choose their level of cost-reducing RD.The upstream firm has two choices: sharing one downstream firm's RD costs or vertical integration.The total profits under cost sharing RD and vertical integration were compared.Through examining the changes of total RD level under two cases,this study clarifies under which case can improve the level of social welfare can be improved.This study provides reference for a decision-making of cooperation RD firms.