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A Price Theory of Vertical and Lateral Integration

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  • Patrick Legros
  • Andrew Newman

Abstract

This article presents a perfectly competitive model of firm boundary decisions and study their interplay with product demand, technology, and welfare. Integration is privately costly but is effective at coordinating production decisions; nonintegration is less costly but coordinates relatively poorly. Output price influences the choice of ownership structure: integration increases with the price level. At the same time, ownership affects output, because integration is more productive than nonintegration. For a generic set of demand functions, equilibrium delivers heterogeneity of ownership and performance among ex ante identical enterprises. The price mechanism transmutes demand shifts into industry-wide reorganizations and generates external effects from technological shocks: productivity changes in some firms may induce ownership changes in others. If the enterprise managers have full title to its revenues, market equilibrium ownership structures are second-best efficient. When managers have less than full revenue claims, equilibrium can be inefficient, with too little integration. JEL Codes: D21, D23, D41, L11, L14, L22. Copyright 2013, Oxford University Press.
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  • Patrick Legros & Andrew Newman, 2013. "A Price Theory of Vertical and Lateral Integration," ULB Institutional Repository 2013/141436, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/141436
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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