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Do Prices Determine Vertical Integration? Evidence from Trade Policy

Author

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  • Newman, Andrew
  • Conconi, Paola
  • Alfaro, Laura
  • Fadinger, Harald

Abstract

What is the relationship between product prices and vertical integration? While the literature has focused on how integration affects prices, this paper shows that prices can affect integration. Many theories in organizational economics and industrial organization posit that integration, while costly, increases productivity. If true, it follows from firms' maximizing behavior that higher prices cause firms to choose more integration. The reason is that at low prices, increases in revenue resulting from enhanced productivity are too small to justify the cost, whereas at higher prices, the revenue benefits exceeds the cost. Trade policy provides a source of exogenous price variation to assess the validity of this prediction: higher tari ffs should lead to higher prices and therefore to more integration. . We construct firm-level indices of vertical integration for a large set of countries and industries and exploit cross-section and time-series variation in import tari s to examine their impact on firm boundaries. Our empirical results provide strong support for the view that output prices are a key determinant of vertical integration.

Suggested Citation

  • Newman, Andrew & Conconi, Paola & Alfaro, Laura & Fadinger, Harald, 2012. "Do Prices Determine Vertical Integration? Evidence from Trade Policy," CEPR Discussion Papers 9200, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9200
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    Cited by:

    1. Buehler, Stefan & Burghardt, Dirk, 2013. "Globalization and Vertical Structure: An Empirical Investigation," Economics Working Paper Series 1310, University of St. Gallen, School of Economics and Political Science.
    2. Johannes Boehm, 2014. "The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity," 2014 Meeting Papers 340, Society for Economic Dynamics.
    3. Laura Alfaro & Pol Antràs & Davin Chor & Paola Conconi, 2019. "Internalizing Global Value Chains: A Firm-Level Analysis," Journal of Political Economy, University of Chicago Press, vol. 127(2), pages 508-559.
    4. Conconi, Paola & Sapir, André & Zanardi, Maurizio, 2016. "The internationalization process of firms: From exports to FDI," Journal of International Economics, Elsevier, vol. 99(C), pages 16-30.
    5. Galdon-Sanchez, Jose Enrique & Gil, Ricard & Bayo-Moriones, Alberto, 2015. "Outsourcing of peripheral services: Evidence from Spanish manufacturing plant-level data," European Economic Review, Elsevier, vol. 78(C), pages 328-344.
    6. Peter Arendorf Bache & Anders Laugesen, 2013. "Trade Liberalisation and Vertical Integration," Economics Working Papers 2013-14, Department of Economics and Business Economics, Aarhus University.
    7. 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.
    8. repec:hal:spmain:info:hdl:2441/185h5h2nvv9lqr7nmeddt9uu5l is not listed on IDEAS
    9. repec:hal:wpspec:info:hdl:2441/1uut5itepl9q5osfl3tj7qatje is not listed on IDEAS
    10. repec:hal:spmain:info:hdl:2441/1uut5itepl9q5osfl3tj7qatje is not listed on IDEAS
    11. Del Prete, Davide & Rungi, Armando, 2017. "Organizing the global value chain: A firm-level test," Journal of International Economics, Elsevier, vol. 109(C), pages 16-30.

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    More about this item

    Keywords

    Product prices; Theory of the firm; Vertical integration;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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