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Market size and vertical integration: Stigler’s hypothesis reconsidered

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  • Walter Elberfeld

Abstract

According to Stigler [1951], vertical disintegration should be the typical development in growing industries, vertical integration in declining industries. The basic argument is that firms will spin off production stages subject to increasing returns to scale in response to market growth. This paper re‐examines Stigler’s hypothesis within an equilibrium model of industrial structure in which the organization of firms is endogenous. Stigler’s hypothesis is confirmed when entry into markets is free and firms compete. However, when entry into the intermediate good market is restricted, or intermediate good producers collude, vertical integration increases with market size.

Suggested Citation

  • Walter Elberfeld, 2002. "Market size and vertical integration: Stigler’s hypothesis reconsidered," Journal of Industrial Economics, Wiley Blackwell, vol. 50(1), pages 23-42, March.
    • Handle: RePEc:bla:jindec:v:50:y:2002:i:1:p:23-42
    DOI: 10.1111/1467-6451.00166
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    Citations

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    Cited by:

    1. Noriaki Matsushima & Tomomichi Mizuno, 2007. "Why do large firms tend to integrate vertically? - asymmetric vertical integration reconsidered -," Discussion Papers 2007-34, Kobe University, Graduate School of Business Administration.
    2. repec:dau:papers:123456789/5841 is not listed on IDEAS
    3. Timothy Bresnahan & Jonathan Levin, 2012. "Vertical Integration and Market Structure [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    4. Kensuke Kubo, 2011. "Explaining vertical integration in the generic pharmaceutical industry," Discussion Papers 11-02, Indian Statistical Institute, Delhi.
    5. Ioannis Pinopoulos, 2014. "Downstream Market Power and the Lerner Index," Discussion Paper Series 2014_07, Department of Economics, University of Macedonia, revised Nov 2014.
    6. Zanaj Skerdilajda, 2010. "Successive Oligopolies and Decreasing Returns," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-26, November.
    7. Stefany Moreno Burbano, 2016. "Estructura vertical de la industria manufacturera colombiana entre 1990 - 2013," Borradores de Economia 14237, Banco de la Republica.
    8. Matsushima Noriaki & Mizuno Tomomichi, 2012. "Equilibrium Vertical Integration with Complementary Input Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-32, June.
    9. Maija Halonen‐Akatwijuka, 2010. "Organizational Design, Technology and the Boundaries of the Firm," Economica, London School of Economics and Political Science, vol. 77(307), pages 544-564, July.
    10. Ahmad Reza Saboori Memar & Georg Götz, 2013. "R&D Incentives in Vertically Related Markets," MAGKS Papers on Economics 201307, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    11. Eckel, Carsten, 2003. "Does globalization lead to specialization?," University of Göttingen Working Papers in Economics 20, University of Goettingen, Department of Economics.
    12. Stefan Buehler & Armin Schmutzler, 2004. "Intimidating Competitors � Endogenous Vertical Integration and Downstream Investment in Successive Oligopoly," SOI - Working Papers 0409, Socioeconomic Institute - University of Zurich, revised Jul 2005.
    13. Thomas Hutzschenreuter & Florian Gröne, 2009. "Changing Vertical Integration Strategies under Pressure from Foreign Competition: The Case of US and German Multinationals," Journal of Management Studies, Wiley Blackwell, vol. 46(2), pages 269-307, March.
    14. Lin, Ping, 2006. "Strategic spin-offs of input divisions," European Economic Review, Elsevier, vol. 50(4), pages 977-993, May.
    15. Zanaj Skerdilajda, 2010. "Successive Oligopolies and Decreasing Returns," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-26, November.
    16. repec:got:cegedp:20 is not listed on IDEAS
    17. Ivan Dufeu, 2004. "Market Size and Vertical Equilibrium in the Context of Successive Cournot Oligopolies [Taille du marché et équilibre vertical dans un contexte d'oligopoles successifs de Cournot]," Post-Print hal-02816481, HAL.
    18. Buehler, Stefan & Schmutzler, Armin, 2008. "Intimidating competitors -- Endogenous vertical integration and downstream investment in successive oligopoly," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 247-265, January.

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