This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Firms' Procurement Decisions: Is Input Specificity Always an Argument for Vertical Integration?

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Thiele, Veikko

Additional information is available for the following registered author(s):

Abstract

The transaction cost theory predicts that firms are inclined to vertically integrate transactions in response to the specificity of their required inputs. Yet, reality proves that some firms engage in repeated transactions with external suppliers aimed at procuring highly specific inputs. To explain this phenomenon, this paper investigates a firm's make-or-buy decision in a context with relational (i.e. non-enforceable) contracts, and exposes how this decision is affected by the required input specificity. This paper demonstrates that a high degree of input specificity can lead to repeated market transactions being favored over vertical integration because demanding more specific inputs is shown to (i) impose lower costs on firms to maintain repeated market transactions founded on relational contracts; and (ii), facilitate the self-enforcement of these relational contracts.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://mpra.ub.uni-muenchen.de/2471/
File Format:
File Function: orginal version
Download Restriction: no
File URL: http://mpra.ub.uni-muenchen.de/8372/
File Format:
File Function: revised version
Download Restriction: no

Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2471.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: 21 Apr 2008
Date of revision:
Handle: RePEc:pra:mprapa:2471

Contact details of provider:
Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Ekkehart Schlicht).

Related research
Keywords: Input specificity vertical integration market transactions relational contracts transaction cost theory

Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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.:
  1. Klein, Benjamin, 2000. "Fisher-General Motors and the Nature of the Firm," Journal of Law & Economics, University of Chicago Press, vol. 43(1), pages 105-41, April.
  2. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law & Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  3. Binmore, Ken & Shaked, Avner & Sutton, John, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 753-70, November. [Downloadable!] (restricted)
  4. Demsetz, Harold, 1988. "The Theory of the Firm Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 141-61, Spring.
  5. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
    Other versions:
  6. Pearce, David G. & Stacchetti, Ennio, 1998. "The Interaction of Implicit and Explicit Contracts in Repeated Agency," Games and Economic Behavior, Elsevier, vol. 23(1), pages 75-96, April. [Downloadable!] (restricted)
  7. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics. [Downloadable!]
    Other versions:
  8. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
    Other versions:
  9. Riordan, Michael H. & Williamson, Oliver E., 1985. "Asset specificity and economic organization," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 365-378, December. [Downloadable!] (restricted)
  10. Telser, L G, 1980. "A Theory of Self-enforcing Agreements," Journal of Business, University of Chicago Press, vol. 53(1), pages 27-44, January. [Downloadable!] (restricted)
  11. Holmstrom, Bengt & Roberts, John, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall. [Downloadable!] (restricted)
  12. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Blackwell Publishing, vol. 55(4), pages 541-54, October. [Downloadable!] (restricted)
  13. Kirk Monteverde & David J. Teece, 1982. "Supplier Switching Costs and Vertical Integration in the Automobile Industry," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 206-213, Spring. [Downloadable!] (restricted)
  14. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, vol. 112(481), pages 539-558, July. [Downloadable!] (restricted)
  15. Hideshi Itoh & Hodaka Morita, 2006. "Formal Contracts, Relational Contracts, and the Holdup Problem," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  16. Bull, Clive, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 147-59, February. [Downloadable!] (restricted)
  17. Joskow, Paul L, 1988. "Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 95-117, Spring.
  18. Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law & Economics, University of Chicago Press, vol. 27(2), pages 403-17, October.
  19. Klein, Benjamin, 1988. "Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 199-213, Spring.
Full references

Statistics
Access and download statistics

Did you know? All full texts are decentralized with the publishers, none reside on this server, thus making it possible to offer this service for free to all parties.

This page was last updated on 2008-11-17.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.