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Integration vs. Outsourcing in Industry Equilibrium

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  • Gene 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 unique, specialized component. Vertically integrated firms can manufacture the components they need in the quantity and type that maximizes profits, but they face a relatively high cost due to diseconomies of scope. Specialized firms can produce at lower cost, but outsourcing imposes costs due to search frictions and imperfect contracting. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the industry, the nature of the search technology, the division of bargaining strength between intermediate and final producers, and the sensitivity of manufacturing costs to input characteristics affect the equilibrium organizational form.

Suggested Citation

  • Gene Grossman & Elhanan Helpman, 2001. "Integration vs. Outsourcing in Industry Equilibrium," CESifo Working Paper Series 460, CESifo.
  • Handle: RePEc:ces:ceswps:_460
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    Cited by:

    1. Dalia Marin & Thierry Verdier, 2008. "Power Inside The Firm and The Market: A General Equilibrium Approach," Journal of the European Economic Association, MIT Press, vol. 6(4), pages 752-788, June.
    2. Marin, Dalia & Verdier, Thierry, 2012. "Globalization and the empowerment of talent," Journal of International Economics, Elsevier, vol. 86(2), pages 209-223.
    3. Marin, Dalia, 2004. "‘A Nation of Poets and Thinkers’ - Less So with Eastern Enlargement? Austria and Germany," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 77, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Pol Antràs, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September.
    5. Eric W. Bond, 2001. "Commercial Policy in a "Fragmented" World," American Economic Review, American Economic Association, vol. 91(2), pages 358-362, May.
    6. Duranton, Gilles & Puga, Diego, 2005. "From sectoral to functional urban specialisation," Journal of Urban Economics, Elsevier, vol. 57(2), pages 343-370, March.
    7. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
    8. Eppinger, Peter S. & Kukharskyy, Bohdan, 2017. "Contracting institutions and firm boundaries," University of Tübingen Working Papers in Business and Economics 100, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    9. Marin, Dalia & Verdier, Thierry, 2002. "Power Inside the Firm and the Market," Discussion Papers in Economics 10, University of Munich, Department of Economics.
    10. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1375-1418.
    11. Valeria Gattai, 2008. "A Tale of Three Countries: Italian, Spanish and Swiss Manufacturing Operations in China," The World Economy, Wiley Blackwell, vol. 31(8), pages 969-992, August.
    12. Ottaviano, Gianmarco & Naghavi, Alireza, 2006. "Outsourcing, Contracts and Innovation Networks," CEPR Discussion Papers 5681, C.E.P.R. Discussion Papers.
    13. Gattai, Valeria, 2006. "A Tale of Three Countries: Italian, Spanish and Swiss Manufacturing Operations in China," Knowledge, Technology, Human Capital Working Papers 12104, Fondazione Eni Enrico Mattei (FEEM).
    14. Marin, Dalia, 2004. "A Nation of Poets and Thinkers - Less so with Eastern Enlargement? Austria and Germany," CEPR Discussion Papers 4358, C.E.P.R. Discussion Papers.
    15. Ildikó Magyari, 2017. "Firm Reorganization, Chinese Imports, and US Manufacturing Employment," Working Papers 17-58, Center for Economic Studies, U.S. Census Bureau.
    16. Eric W. Bond, 2008. "Input Quality, Relational Contracts And International Outsourcing," Pacific Economic Review, Wiley Blackwell, vol. 13(4), pages 391-404, October.

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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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