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The U-shaped relationship between vertical integration and competition: theory and evidence

  • Philippe Aghion


    (Institute for Fiscal Studies and Harvard University)

  • Rachel Griffith


    (Institute for Fiscal Studies and IFS and Manchester)

  • Peter Howitt


    (Institute for Fiscal Studies and Brown University)

This paper considers how competition can affect aggregate innovative activity through its effects on firms' decision whether or not to vertically integrate. A moderate increase in competition enhances innovation incentives, too much competition discourages innovative effort. These effects generates an inverted-U relationship between competition and innovation and between competition and the incentive to vertically integrate. Preliminary evidence finds that there is a non-linear relationship between competition and the propensity of firms to vertically integrate. These results seem to be more consistent with the Property Right Theory (PRT) of vertical integration than with the Transaction Cost Economics (TCE) approach.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W06/12.

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Length: 16 pp.
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:ifs:ifsewp:06/12
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  1. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  2. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
  3. repec:tpr:qjecon:v:120:y:2005:i:2:p:701-728 is not listed on IDEAS
  4. Acemoglu, Daron & Aghion, Philippe & Griffith, Rachel & Zilibotti, Fabrizio, 2005. "Vertical Integration and Technology: Theory and Evidence," CEPR Discussion Papers 5258, C.E.P.R. Discussion Papers.
  5. Caves, Richard E. & Bradburd, Ralph M., 1988. "The empirical determinants of vertical integration," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 265-279, April.
  6. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and Innovation: An Inverted U Relationship," NBER Working Papers 9269, National Bureau of Economic Research, Inc.
  7. 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.
  8. Klein, Benjamin, 1988. "Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 199-213, Spring.
  9. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-85, March.
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