Supply Chain Control: A Theory of Vertical Integration
AbstractImproving a company's bargaining position is often cited as a chief motivation to vertically integrate with suppliers. This paper expands on that view in building a new theory of vertical integration. In my model firms integrate to gain bargaining power against other suppliers in the production process. The cost of integration is a loss of flexibility in choosing the most suitable suppliers for a particular final product. I show that the firms who make the most specific investments in the production process have the greatest incentive to integrate. The theory provides novel insights to the understanding of numerous stylized facts such as the effect of financial development on the vertical structure of firms, the observed pattern from FDI to outsourcing in international trade, the effect of technological obsolescence on organizations, etc.
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Bibliographic InfoPaper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Quaderni dell'Istituto di Economia dell'Impresa e del Lavoro with number ieil0053.
Length: 32 pages
Date of creation: Oct 2009
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Web page: http://www.unicatt.it/Istituti/EconomiaImpresaLavoro
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vertical integration; supply chain; bargaining; outside options;
Find related papers by JEL classification:
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
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- Professor Dr. Joachim Zentes, 2011. "„Sustainability – Supply Security – Distributive Justice: A Global Area Of Conflict“," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 2(39), pages 201-218, May.
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