A Price Theory of Vertical and Lateral Integration (Revised Version)
We present a perfectly-competitive model of firm boundary decisions and study their interplay with product demand, technology, and welfare. Integration is pri- vately costly but is effective at coordinating production decisions; non-integration is less costly, but coordinates relatively poorly. Output price influences the choice of ownership structure: integration increases with the price level. At the same time, own- ership affects output, since integration is more productive than non-integration. For a generic set of demand functions, the result is heterogeneity of ownership and perfor- mance among ex-ante identical enterprises. The price mechanism transmutes demand shifts into industry-wide re-organizations and generates external effects from techno- logical shocks: productivity changes in some firms may induce ownership changes in others. If the enterprise managers have full title to its revenues, market equilibrium ownership structures are second-best efficient. When managers have less than full revenue claims, equilibrium can be inefficient, with too little integration.
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- Benjamin E. Hermalin, 1994.
"Heterogeneity in Organizational Form: Why Otherwise Identical Firms Choose Different Incentives for Their Managers,"
RAND Journal of Economics,
The RAND Corporation, vol. 25(4), pages 518-537, Winter.
- Hermalin, Benjamin E., 1992. "Heterogeneity in Organizational Form: Why Otherwise Identical Firms Choose Different Incentives for Their Managers," Department of Economics, Working Paper Series qt4v4548gz, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Benjamin E. Hermalin., 1992. "Heterogeneity in Organizational Form: Why Otherwise Identical Firms Choose Different Incentives for Their Managers," Economics Working Papers 92-193, University of California at Berkeley.
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