The Organization of Supply: a Vertical Equilibrium Analysis
AbstractIn this paper I study how the make-or-buy decision of a firm depends on the organization of its peers. I consider a multi-firm framework in which firms choose whether to integrate into the supply of an intermediate input or to outsource its production, and choose the size of their supplier network if outsourcing. Firms find it optimal to share the same set of suppliers, as there are economies of scope in investment to suppliers taking multiple designs. These economies are due to spillovers of technical or operational know-how between projects and to savings in the setup costs on physical capital. The model admits multiple vertical equilibria that are Pareto-ranked, the one with the highest level of outsourcing being most efficient. Outsourcing is more likely in larger markets and when the economies of scope are stronger. The size of the optimal supplier network however typically decreases when the spillovers are stronger. These findings provide an insight to the patterns of reorganization of vertical supply relations observed over the last two decades
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 142.
Date of creation: 11 Aug 2004
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utsourcing; Vertical Integration; Spillovers; Supply relations;
Other versions of this item:
- Nadav Levy, 2004. "The Organization of Supply: a Vertical Equilibrium Analysis," Discussion Papers 04-01, University at Albany, SUNY, Department of Economics.
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-16 (All new papers)
- NEP-COM-2004-08-16 (Industrial Competition)
- NEP-MIC-2004-08-16 (Microeconomics)
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