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Vertical Integration and Operational Flexibility

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  • M. Moretto
  • G. Rossini

Abstract

The main aim of the paper is to highlight the relation between flexibility and vertical integration. To this purpose, we go through the selection of the optimal degree of vertical disintegration of a flexible firm which operates in a dynamic uncertain environment. The enterprise we model enjoys flexibility since it can switch from a certain amount of disintegration to vertical integration and viceversa. This means that the firm never loses vertical control, i.e., the ability to produce all inputs even when it buys them in the market. This sort of flexibility makes for results which are somehow contrary to the Industrial Organization recent literature and closer to the Operations Research results. In this sense we provide a bridge between the two approaches and rescue Industrial Organization from counterintuitive conclusions.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 631.

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Date of creation: Mar 2008
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Handle: RePEc:bol:bodewp:631

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  1. Raghuram G. Rajan & Luigi Zingales, 2000. "The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms," NBER Working Papers 7546, National Bureau of Economic Research, Inc.
  2. Zilibotti, Fabrizio & Griffith, Rachel & Aghion, Philippe & Acemoglu, Daron, 2010. "Vertical Integration and Technology: Theory and Evidence," Scholarly Articles 4554219, Harvard University Department of Economics.
  3. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
  4. McLaren, J., 1996. "'Globalization' and Vertical Structure," Discussion Papers, Columbia University, Department of Economics 1996_21, Columbia University, Department of Economics.
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  7. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(4), pages 691-719, August.
  8. Alvarez, Luis H.R. & Stenbacka, Rune, 2007. "Partial outsourcing: A real options perspective," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 25(1), pages 91-102, February.
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  14. Daron Acemoglu & Simon Johnson & Todd Mitton, 2005. "Determinants of Vertical Integration: Finance, Contracts, and Regulation," NBER Working Papers 11424, National Bureau of Economic Research, Inc.
  15. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 85-120, February.
  16. Armour, Henry Ogden & Teece, David J, 1980. "Vertical Integration and Technological Innovation," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 470-74, August.
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  18. repec:hrv:faseco:4784029 is not listed on IDEAS
  19. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 58, pages 347.
  20. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(1-2), pages 145-166.
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Cited by:
  1. Michele Moretto & Luca Di Corato, 2009. "Investing in Biogas: Timing, Technological Choice and the Value of Flexibility from Inputs Mix," Working Papers, Fondazione Eni Enrico Mattei 2009.84, Fondazione Eni Enrico Mattei.
  2. Gianpaolo Rossini & Cecilia Vergari, 2009. "Input Production Joint Venture," Working Papers, Fondazione Eni Enrico Mattei 2009.89, Fondazione Eni Enrico Mattei.

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