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Incomplete Contracts and Industrial Organization

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  • Gene M. Grossman
  • Elhanan Helpman

Abstract

We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a unique, specialized component. Vertically integrated firms can manufacture the components they need in the quantity and type that maximizes profits, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but input suppliers face a potential hold-up problem. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the market and other parameters affect the equilibrium choices, and how the equilibrium compares with the efficient allocation.

Suggested Citation

  • Gene M. Grossman & Elhanan Helpman, 1999. "Incomplete Contracts and Industrial Organization," NBER Working Papers 7303, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7303 Note: IO
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    References listed on IDEAS

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    Cited by:

    1. Walter Elberfeld & Georg Götz, 2002. "Market Size, Technology Choice, and Market Structure," German Economic Review, Verein für Socialpolitik, vol. 3(1), pages 25-41, February.
    2. Kabiraj, Tarun & Sinha, Uday Bhanu, 2016. "Strategic outsourcing with technology transfer under price competition," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 281-290.
    3. Yijiang Wang, "undated". "Product Market Conditions and Job Design," Working Papers 0402, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).
    4. Shy, Oz & Stenbacka, Rune, 2003. "Strategic outsourcing," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 203-224, February.
    5. Alessandro Turrini & Dieter M. Urban, 2001. "For Whom is MAI? A theoretical Perspective on Multilateral Agreements on Investments," Development Working Papers 151, Centro Studi Luca d'Agliano, University of Milano.
    6. Rodriguez-Palenzuela, Diego, 2001. "Sources of economic renewal: from the traditional firm to the knowledge firm," Working Paper Series 0043, European Central Bank.
    7. Valeria Gattai, 2006. "From the Theory of the Firm to FDI and Internalisation: A Survey," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 225-262, November.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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