Advanced Search
MyIDEAS: Login

A Price Theory of Vertical and Lateral Integration

Contents:

Author Info

  • Legros, Patrick
  • Newman, Andrew

Abstract

We construct a price-theoretic model of firms' integration decisions under perfect competition and study their interplay with consumer demand and welfare. Integration is costly to implement but is effective at coordinating production decisions. The price of output influences the ownership structure chosen: there is an inverted-U relation between the degree of integration and product price. Ownership in turn affects output: integration is more productive than non-integration at low prices, and less productive at high prices. If the managers deciding organizational design have full claim to firm revenues, market equilibrium ownership choices will be second-best efficient. When managers have less than a full claim on profits, however, total welfare may sometimes be increased by a social planner who could force some firms to reorganize. The price mechanism tends to correlate reorganizations across firms and generates external effects of technological shocks: productivity changes in some firms may have little effect on their own organization, while inducing changes of ownership in the rest of the industry. Terms of trade in supplier markets also affect ownership structure; entry of low-cost suppliers may induce reorganizations that raise prices. The model can generate coexistence of different ownership structures, even among ex-ante identical firms.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cepr.org/pubs/dps/DP7211.asp
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7211.

as in new window
Length:
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:cpr:ceprdp:7211

Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

Related research

Keywords: decision rights; incomplete contracts; integration; ownership; price theory;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. de Meza, David & Southey, Clive, 1999. "Too Much Monitoring, Not Enough Performance Pay," Economic Journal, Royal Economic Society, vol. 109(454), pages C126-39, March.
  2. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  3. Oliver Hart & John Moore, 2004. "On the Design of Hierarchies: Coordination versus Specialization," ESE Discussion Papers 117, Edinburgh School of Economics, University of Edinburgh.
  4. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
  5. Van den Steen, Eric, 2003. "Organizational Beliefs and Managerial Vision," Working papers 4224-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Oliver Hart & Bengt Holmstrom, 2008. "A Theory of Firm Scope," NBER Working Papers 14613, National Bureau of Economic Research, Inc.
  7. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October.
  8. Patrick Legros & Andrew Newman, 1996. "Wealth effects, distribution, and the theory of organization," ULB Institutional Repository 2013/7036, ULB -- Universite Libre de Bruxelles.
  9. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
  10. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  11. George J. Mailath & Volker Nocke & Andrew Postlewaite, 2002. "Business Strategy, Human Capital, and Managerial Incentives," PIER Working Paper Archive 03-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 23 Jun 2003.
  12. Conconi, Paola & Legros, Patrick & Newman, Andrew F., 2012. "Trade liberalization and organizational change," Journal of International Economics, Elsevier, vol. 86(2), pages 197-208.
  13. Mathias Dewatripont & Patrick Bolton, 1994. "The firm as a communication network," ULB Institutional Repository 2013/9595, ULB -- Universite Libre de Bruxelles.
  14. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
  15. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  16. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, vol. 41(2), pages 193-229, June.
  17. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
  18. Powell, Ronan & Yawson, Alfred, 2005. "Industry aspects of takeovers and divestitures: Evidence from the UK," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3015-3040, December.
  19. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  20. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Andrew F. Newman & Patrick Legros, 2011. "Incomplete Contracts and Industrial Organization: A Survey," Boston University - Department of Economics - Working Papers Series WP2011-036, Boston University - Department of Economics.
  2. Simone Moriconi, 2012. "Taxation and Incomplete Contracts," CREA Discussion Paper Series 12-08, Center for Research in Economic Analysis, University of Luxembourg.
  3. Román Fossati, 2012. "Outsourcing versus vertical integration: A dynamic model of industry equilibrium," Working Papers 2012-07, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  4. Andrew F. Newman & Laura Alfaro & Paola Conconi & Harald Fadinger, 2011. "Trade Policy and Firm Boundaries," Boston University - Department of Economics - Working Papers Series WP2011-035, Boston University - Department of Economics.
  5. Andrew F. Newman & Patrick Legros & Paola Conconi, 2011. "Trade Liberalization and Organizational Change," Boston University - Department of Economics - Working Papers Series WP2011-037, Boston University - Department of Economics.
  6. Serfes, Konstantinos, 2013. "A Price Theory of Vertical and Lateral Integration under Two-Sided Productivity Heterogeneity," School of Economics Working Paper Series 2013-6, LeBow College of Business, Drexel University, revised 06 Mar 2014.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:7211. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.