Networks versus Vertical Integration
AbstractWe construct a theory to compare vertically integrated firms to networks of manufacturers and suppliers. Vertically integrated firms make their own specialized inputs. In networks, manufacturers procure specialized inputs from suppliers that, in turn, sell to several manufacturers. The analysis shows that networks can yield greater social welfare when manufacturers experience large idiosyncratic demand shocks. Individual firms may also have the incentive to form networks, despite the lack of long-term contracts. The analysis is supported by existing evidence and provides predictions as to the shape of different industries.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 31 (2000)
Issue (Month): 3 (Autumn)
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- José Pontes, 2007.
"Networks and firm location,"
The Annals of Regional Science,
Springer, vol. 41(4), pages 897-909, December.
- Lazzarini, Sergio G., 2002. "The Performance Implications of Membership in Competing Firm Constellations: Evidence from the Global Airline Industry," Insper Working Papers wpe_23, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
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