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Supply Chain Control: A Theory of Vertical Integration

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  • Ursino, Giovanni
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    Abstract

    Improving 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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    File URL: http://mpra.ub.uni-muenchen.de/18357/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18357.

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    Date of creation: 01 Oct 2009
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    Handle: RePEc:pra:mprapa:18357

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    Keywords: vertical integration; supply chain; bargaining; outside options;

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    Cited by:
    1. 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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