While mergers, both horizontal and vertical, have been shaping the landscape of the agri-food industry in Europe, the implications of the changing market structure on the level of innovation has not been studied yet. In this paper we deal with the link between innovation and market structure using the empirical example of the Danish agri-food industry. The purpose of this paper is two-fold. First we test for the importance of vertical integration on innovation. While there exist several studies on this linkage, to our knowledge, this is the first that deals with the agri-food industry. Secondly, we examine both product proliferation and innovation. To our knowledge, there are no other similar studies that examine both aspects using the same data set. We follow the hypothesis put forward by Armour and Teece (1980) that vertical integration enhances technological innovation, mainly because vertical integration may resolve hold-up problems. Our paper is related also to recent work by Weiss and Witkopp (2005) on the German food industry, although their work is mostly related to the role of the retail sector. We are able to examine both innovation (measured as investment on R&D) as well as product proliferation (measured as number of new products). We also examine the effects of network relationships and the importance of countervailing power. We use data from an extensive survey of 444 Danish firms over two years, 2000 and 2005 to estimate two different models: a bootstrapped zero-inflated Poisson regression and a robust Heckman sample selection model. The results verify the hypotheses formulated for both models with various degrees of significance.