The Organization of Supply: a Vertical Equilibrium Analysis
In this paper I study how the make-or-buy decision of a firm depends on the organization of its peers. I consider a multi-firm framework in which firms choose whether to integrate into the supply of an intermediate input or to outsource its production, and choose the size of their supplier network if outsourcing. Firms find it optimal to share the same set of suppliers, as there are economies of scope in investment to suppliers taking multiple designs. These economies are due to spillovers of technical or operational know-how between projects and to savings in the setup costs on physical capital. The model admits multiple vertical equilibria that are Pareto-ranked, the one with the highest level of outsourcing being most efficient. Outsourcing is more likely in larger markets and when the economies of scope are stronger. The size of the optimal supplier network however typically decreases when the spillovers are stronger. These findings provide an insight to the patterns of reorganization of vertical supply relations observed over the last two decades
|Date of creation:||11 Aug 2004|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Abraham, Katharine G & Taylor, Susan K, 1996.
"Firms' Use of Outside Contractors: Theory and Evidence,"
Journal of Labor Economics,
University of Chicago Press, vol. 14(3), pages 394-424, July.
- Katharine G. Abraham & Susan K. Taylor, 1993. "Firms' Use of Outside Contractors: Theory and Evidence," NBER Working Papers 4468, National Bureau of Economic Research, Inc.
- Grossman, Sanford J. & Hart, Oliver D., 1986.
"The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration,"
3450060, Harvard University Department of Economics.
- Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
- Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
- Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
- Robert Feenstra, 2003.
"Integration Of Trade And Disintegration Of Production In The Global Economy,"
986, University of California, Davis, Department of Economics.
- Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
- Robert C. Feenstra, "undated". "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
- Raghuram G. Rajan & Luigi Zingales, 1997.
"Power in a Theory of the Firm,"
NBER Working Papers
6274, National Bureau of Economic Research, Inc.
- Raghuram G. Rajan & Luigi Zingales, "undated". "Power in a Theory of the Firm," CRSP working papers 335, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Rajan, Raghuram G & Zingales, Luigi, 1998. "Power in a Theory of the Firm," CEPR Discussion Papers 1777, C.E.P.R. Discussion Papers.
- J. Yannis Bakos & Erik Brynjolfsson, 1997. "From Vendors to Partners: Information Technology and Incomplete Contracts in Buyer-Supplier Relationships," Working Paper Series 154, MIT Center for Coordination Science.
- 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.
- Thomas J. Holmes, 1995.
"Localization of industry and vertical disintegration,"
190, Federal Reserve Bank of Minneapolis.
- Thomas J. Holmes, 1999. "Localization Of Industry And Vertical Disintegration," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 314-325, May.
- George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59, pages 185-185.
- Oliver Hart & John Moore, 1988.
"Property Rights and the Nature of the Firm,"
495, Massachusetts Institute of Technology (MIT), Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:ecm:nasm04:142. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.