Do Prices Determine Vertical Integration?
AbstractWhat is the relationship between product prices and vertical integration? While the literature has focused on how integration affects prices, this paper provides evidence that prices can affect integration. Many theories in organizational economics and industrial organization posit that integration, while costly, increases productivity. It follows from firms' maximizing behavior that higher prices induce 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 high prices the revenue benefit exceeds the cost. Trade policy provides a source of exogenous price variation to assess the validity of this prediction: higher tariffs 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 tariffs 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.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16118.
Date of creation: Jun 2010
Date of revision:
Note: IO ITI
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Find related papers by JEL classification:
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-26 (All new papers)
- NEP-BEC-2010-06-26 (Business Economics)
- NEP-INT-2010-06-26 (International Trade)
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.:
- Van den Steen, Eric, 2003.
"Organizational Beliefs and Managerial Vision,"
4224-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Pol Antràs, 2011.
"Grossman-Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production,"
NBER Working Papers
17470, National Bureau of Economic Research, Inc.
- Antràs, Pol, 2011. "Grossman-Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production," CEPR Discussion Papers 8598, C.E.P.R. Discussion Papers.
- Peter Arendorf Bache & Anders Laugesen, 2013. "Trade Liberalisation and Vertical Integration," Economics Working Papers 2013-14, School of Economics and Management, University of Aarhus.
- Pedro Mendi & Rafael Moner-Colonques & José Sempere-Monerris, 2011. "Vertical integration, collusion, and tariffs," SERIEs, Spanish Economic Association, vol. 2(3), pages 359-378, September.
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