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Outsourcing and Vertical Integration in a Competitive Industry

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Author Info

  • Federico Ciliberto

    ()
    (Department of Economics, University of Virginia, P.O. Box 400182, Charlottesville, VA 22904-4182, USA)

  • John C. Panzar

    ()
    (The University of Auckland Business School, Owen G. Glenn Building, 12 Grafton Road, Auckland, New Zealand)

Abstract

We develop a partial equilibrium, perfectly competitive framework of a (potentially) vertically integrated industry. There are three types of firms: upstream firms that use primary factors to produce an intermediate good; downstream firms that use primary factors and intermediate goods to produce a final good; and vertically integrated firms that do both. We establish conditions under which vertically integrated firms exist and outsource (part of) the production of the intermediate input. We study the changes in industry configurations resulting from changes in costs and demand.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 77 (2011)
Issue (Month): 4 (April)
Pages: 885-900

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Handle: RePEc:sej:ancoec:v:77:4:y:2011:p:885-900

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  1. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Eaton, B Curtis & Lemche, S Q, 1991. "The Geometry of Supply, Demand, and Competitive Market Structure with Economies of Scope," American Economic Review, American Economic Association, vol. 81(4), pages 901-11, September.
  3. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756.
  4. MacDonald, Glenn M & Slivinski, Alan, 1987. "The Simple Analytics of Competitive Equilibrium with Multiproduct Firms," American Economic Review, American Economic Association, vol. 77(5), pages 941-53, December.
  5. Panzar, John C & Willig, Robert D, 1981. "Economies of Scope," American Economic Review, American Economic Association, vol. 71(2), pages 268-72, May.
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Cited by:
  1. Roman Fossati, 2012. "Outsourcing versus Vertical Integration: A Dynamic Model of Industry Equilibrium," Bristol Economics Discussion Papers 12/627, Department of Economics, University of Bristol, UK.

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