TAF PUBLISHING

This study aimed to analyze and compare the economic efficiency of the separation model and vertical integration model. For the industry of downstream Research and Development (R&D), this model examines the effect of market size and product substitutability on the economic output. This study applied the modified Cournot duopoly model proposed by Buehler and Schmutzler (2008) and Milliou and Pavlou (2013). This study establishes the following results: (i) the benefits of a downstream firm on vertical integration will increase when the product substitutability is lower. (ii) While the market size becomes bigger, the benefit has further enhanced this conclusion. The integration firm will promote investment in R&D to cause intimidation effect. (iii) When the product substitutability is higher to a certain degree, the benefits will also increase. Thus, a high degree of product homogeneity and a high degree of product heterogeneity is more suitable for vertical integration. In the long run, the industry that will extend or increase demand suggests a merger as early as possible. These findings imply that in the long run, the early adoption of M&A strategies will lead to better economic benefits to firms from such industries as will see the scale expansion and more demands in the future; it also can help firms to make consideration and planning in advance for whether to expand the scale.