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Integration versus Outsourcing in Industry Equilibrium

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  • Gene M. Grossman
  • Elhanan Helpman

Abstract

We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a specialized component. Vertically integrated firms can manufacture the components they need, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but search for partners is costly, and input suppliers face a potential holdup problem. We study the determinants of the equilibrium mode of organization when inputs are fully or partially specialized.

Suggested Citation

  • Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
  • Handle: RePEc:oup:qjecon:v:117:y:2002:i:1:p:85-120.
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    File URL: http://hdl.handle.net/10.1162/003355302753399454
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