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Vertical Integration: Networks, and Markets

Author

Listed:
  • Rachel E. Kranton

    (Dept. Economics, Univ. Maryland)

  • Deborah F. Minehart

    (Dept. Economics, Boston University)

Abstract

The organization of supply relations varies across industries. This paper builds a theoretical framework to compare three alternative supply structures: vertical integration, networks, and markets. The analysis considers the relationship between uncertainty in demand for specific inputs, investment costs, and industrial structure. It shows that network structures are more likely when productive assets are expensive and firms experience large idiosyncratic shocks in demand. The analysis is supported by existing evidence and provides empirical predictions as to the shape of different industries.

Suggested Citation

  • Rachel E. Kranton & Deborah F. Minehart, 1999. "Vertical Integration: Networks, and Markets," Cowles Foundation Discussion Papers 1231, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1231
    as

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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d12/d1231.pdf
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    References listed on IDEAS

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    Cited by:

    1. Afonso Rodríguez, J. A. & Bruno Pérez, N. A. & J.Giner Rubio, 2004. "Un análisis univariante y multivariante de la diversificación de carteras bajo heterocedasticidad condicionada/Univariate and Multivariate Analysis of The Diversification of Portfolios Under Condition," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 22, pages 375(25á)-37, Agosto.
    2. Seabright, Paul, 2000. "Skill versus judgement and the architecture of organisations," European Economic Review, Elsevier, vol. 44(4-6), pages 856-868, May.

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    More about this item

    Keywords

    Vertical supply; industrial structure; demand uncertainty;
    All these keywords.

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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