Vertical Integration and Efficiency: an application to the Italian Machine Tool Industry
AbstractThis paper analyzes the relationship between firm efficiency and vertical integration in the Italian machine tool (MT) industry. A theoretical model of entry and competition within an industry has been set up. In this model firms can choose either to be vertically integrated or not: the most efficientfirms self-select in being vertically integrated, while less efficientfirms prefer a disintegrated structure and they both coexist in equilibrium. In the second part of the paper the relationship between efficiency and vertical integration has been tested using a stochastic frontier framework in an novel panel dataset including around 500 MT builders. The theoretical prediction is confirmed: outsourcing seems a rational choice for less efficient firms to make positive operating profits and stay in the market; on the other hand, more efficient firms exploit their efficiency advantage to control a greater part of the production chain, possibly benefiting from greater coordination among different phases and tailored intermediate inputs.
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Bibliographic InfoPaper provided by Department of Computer and Management Sciences, University of Trento, Italy in its series DISA Working Papers with number 1006.
Length: 42 pages
Date of creation: Nov 2010
Date of revision: 24 Nov 2010
Postal: DISA Università degli Studi di Trento via Inama, 5 I-38122 Trento TN Italy
Other versions of this item:
- Fabio Pieri & Enrico Zaninotto, 2013. "Vertical integration and efficiency: an application to the Italian machine tool industry," Small Business Economics, Springer, vol. 40(2), pages 397-416, February.
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
- L64 - Industrial Organization - - Industry Studies: Manufacturing - - - Other Machinery; Business Equipment; Armaments
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-04 (All new papers)
- NEP-BEC-2010-12-04 (Business Economics)
- NEP-COM-2010-12-04 (Industrial Competition)
- NEP-EFF-2010-12-04 (Efficiency & Productivity)
- NEP-MIC-2010-12-04 (Microeconomics)
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