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

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    3. Roth,Alvin E. & Sotomayor,Marilda A. Oliveira, 1992. "Two-Sided Matching," Cambridge Books, Cambridge University Press, number 9780521437882.
    4. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 43-61.
    5. Demange, Gabrielle & Gale, David, 1985. "The Strategy Structure of Two-sided Matching Markets," Econometrica, Econometric Society, vol. 53(4), pages 873-888, July.
    6. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    7. Carlton, Dennis W, 1979. "Vertical Integration in Competitive Markets under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 27(3), pages 189-209, March.
    8. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-1153, December.
    9. Helper, Susan & Levine, David I, 1992. "Long-Term Supplier Relations and Product-Market Structure," Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(3), pages 561-581, October.
    10. Patrick Bolton & Michael D. Whinston, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 121-148.
    11. Baron, David P, 1971. "Demand Uncertainty in Imperfect Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(2), pages 196-208, June.
    12. Nicholas Economides & Charles Himmelberg, 1995. "Critical Mass and Network Size with Application to the US Fax Market," Working Papers 95-11, New York University, Leonard N. Stern School of Business, Department of Economics.
    13. Cawthorne, Pamela M., 1995. "Of networks and markets: The rise and rise of a South Indian town, the example of Tiruppur's cotton knitwear industry," World Development, Elsevier, vol. 23(1), pages 43-56, January.
    14. Aksoy, Asu & Robins, Kevin, 1992. "Hollywood for the 21st Century: Global Competition for Critical Mass in Image Markets," Cambridge Journal of Economics, Oxford University Press, vol. 16(1), pages 1-22, March.
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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 Economía Aplicada, Estudios de Economía 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.

    More about this item

    Keywords

    Vertical supply; industrial structure; demand uncertainty;

    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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