Yang Vertical Integration Summary

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In this study, Yang uses data from the US smartphone market from 2009 to 2013 to formulate and estimate a dynamic structural model of a dominant upstream chipset maker and downstream smartphone handset markers. Yang combines bilateral bargaining with dynamic innovation in the model to analyze the impact of vertical integration on innovation, pricing, and welfare in the chipset and smartphone industries. After conducting the counterfactual experiment of a vertical merger(upstream firms merges with downstream firms), Yang finds that vertical integration increases innovation rates and social welfare through the investment effects. Thus, given the dynamic effect of vertical integration is large and positive, providing support for giving more weight …show more content…
In these sections, Yang also does a great job in demonstrating the reasons of making assumptions clearly and explaining how he deals with potential issues related to the assumptions. In the dynamic model, Yang states several crucial benefits of making strong assumptions of a finite horizon and sequential moves, such as the unique of dynamic . In particular, Yang explains clearly how his assumptions are supplement to each other. The assumption of finite horizon and sequential moves eliminate the cooperative equilibrium and strengthen the validity the non-contractibility of dynamic innovation decisions assumption. In the static model, Yang claims that advantage of assuming linear contracts between handset makers and Qualcomm is to simplify the computation. In particular, Yang also points out several related downsides. For example, this assumption leads to inefficiency because of double marginalization. To address this concern, Yang conduct robustness analyze to show that these effect are small compared to investment effects and could be …show more content…
Because of its high dependence on Qualcomm chipsets, HTC is a natural choice for this counterfactual simulation. Thus, the Qualcomm-HTC merger allows Qualcomm and HTC to jointly make innovation decisions. In particular, Yang decomposes the effects of vertical integration into the investment effects and price effects and claims that the investment effects dominate the price effects. Based on the counterfactual simulation results, Yang summarizes how the vertical integration affects the whole industry, such as increasing the innovation of both upstream and downstream firms and increasing consumer surplus and total surplus. In the end of empirical analysis, Yang includes two main robustness checks. The first check considers Qualcomm’s royalty income and the second check considers the effect of additional handset
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