IDEAS home Printed from https://ideas.repec.org/p/wrk/warwec/799.html
   My bibliography  Save this paper

Vertical Integration and Firm Boundaries : The Evidence

Author

Listed:
  • Lafontaine, Francine

    (Stephen M. Ross School of Business, University of Michigan)

  • Slade, Margaret

    (Department of Economics,University of Warwick)

Abstract

Understanding what determines firm boundaries and the choice between interacting in a firm or a market is not only the fundamental concern of the theory of the firm, but it is also one of the most important issues in economics. Data on value added, for example, reveal that in the US, transactions that occur in firms are roughly equal in value to those that occur in markets. The economics profession, however, has devoted much more attention to the workings of markets than to the study of firms, and even less attention to the interface between the two. Nevertheless, since Coase’s (1937) seminal paper on the subject, a rich set of theories has been developed that deal with firm boundaries in vertical or input/output structures. Furthermore, in the last 25 years, empirical evidence that can shed light on those theories has been accumulating.

Suggested Citation

  • Lafontaine, Francine & Slade, Margaret, 2007. "Vertical Integration and Firm Boundaries : The Evidence," The Warwick Economics Research Paper Series (TWERPS) 799, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:799
    as

    Download full text from publisher

    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2007/twerp_799.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
    2. Kirk Monteverde & David J. Teece, 1982. "Supplier Switching Costs and Vertical Integration in the Automobile Industry," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 206-213, Spring.
    3. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
    4. Woodruff, Christopher, 2002. "Non-contractible investments and vertical integration in the Mexican footwear industry," International Journal of Industrial Organization, Elsevier, vol. 20(8), pages 1197-1224, October.
    5. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    6. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    7. Maness, Robert, 1996. "Incomplete contracts and the choice between vertical integration and franchising," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 101-115, October.
    8. Brickley, James A. & Dark, Frederick H., 1987. "The choice of organizational form The case of franchising," Journal of Financial Economics, Elsevier, vol. 18(2), pages 401-420, June.
    9. Joskow, Paul L, 1985. "Vertical Integration and Long-term Contracts: The Case of Coal-burning Electric Generating Plants," Journal of Law, Economics, and Organization, Oxford University Press, vol. 1(1), pages 33-80, Spring.
    10. Warren-Boulton, Frederick R, 1974. "Vertical Control with Variable Proportions," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 783-802, July/Aug..
    11. Norton, Seth W, 1988. "An Empirical Look at Franchising as an Organizational Form," The Journal of Business, University of Chicago Press, vol. 61(2), pages 197-218, April.
    12. Schmalensee, Richard, 1973. "A Note on the Theory of Vertical Integration," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 442-449, Part I, M.
    13. Lieberman, Marvin B, 1991. "Determinants of Vertical Integration: An Empirical Test," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 451-466, September.
    14. Shelanski, Howard A & Klein, Peter G, 1995. "Empirical Research in Transaction Cost Economics: A Review and Assessment," Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(2), pages 335-361, October.
    15. Brousseau,Eric & Glachant,Jean-Michel (ed.), 2002. "The Economics of Contracts," Cambridge Books, Cambridge University Press, number 9780521814904, June.
    16. Blass, Asher A & Carlton, Dennis W, 2001. "The Choice of Organizational Form in Gasoline Retailing and the Cost of Laws That Limit That Choice," Journal of Law and Economics, University of Chicago Press, vol. 44(2), pages 511-524, October.
    17. Thompson, R. Steve, 1994. "The franchise life cycle and the Penrose effect," Journal of Economic Behavior & Organization, Elsevier, vol. 24(2), pages 207-218, July.
    18. Lafontaine, Francine & Slade, Margaret E, 1997. "Retail Contracting: Theory and Practice," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 1-25, March.
    19. Chong-En Bai & Zhigang Tao, 2000. "Contract Mixing in Franchising as a Mechanism for Public-Good Provision," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 85-113, March.
    20. Kenneth S. Corts, 2001. "The Strategic Effects of Vertical Market Structure: Common Agency and Divisionalization in the US Motion Picture Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(4), pages 509-528, December.
    21. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    22. Arturs Kalnins & Francine Lafontaine, 2004. "Multi-unit Ownership in Franchising: Evidence from the Fast-Food Industry in Texas," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 747-761, Winter.
    23. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    24. Thierry Pénard & E. Raynaud & S. Saussier, 2003. "Dual distribution and royalty rates in franchised chains : an empirical exploration using French data," Post-Print halshs-00069582, HAL.
    25. Michael D. Whinston, 2003. "On the Transaction Cost Determinants of Vertical Integration," Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(1), pages 1-23, April.
    26. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    27. Gil, Ricard, 2007. ""Make-or-buy" in movies: Integration and ex-post renegotiation," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 643-655, August.
    28. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 345-356.
    29. Vita, Michael G, 2000. "Regulatory Restrictions on Vertical Integration and Control: The Competitive Impact of Gasoline Divorcement Policies," Journal of Regulatory Economics, Springer, vol. 18(3), pages 217-233, November.
    30. Gonzalez-Diaz, Manuel & Arrunada, Benito & Fernandez, Alberto, 2000. "Causes of subcontracting: evidence from panel data on construction firms," Journal of Economic Behavior & Organization, Elsevier, vol. 42(2), pages 167-187, June.
    31. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    32. Mullin, Joseph C & Mullin, Wallace P, 1997. "United States Steel's Acquisition of the Great Northern Ore Properties: Vertical Foreclosure or Efficient Contractual Governance?," Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(1), pages 74-100, April.
    33. Brousseau,Eric & Glachant,Jean-Michel (ed.), 2002. "The Economics of Contracts," Cambridge Books, Cambridge University Press, number 9780521893138, June.
    34. Ricard Gil & Wesley R. Hartmann, 2011. "Airing Your Dirty Laundry: Vertical Integration, Reputational Capital, and Social Networks," Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(2), pages 219-244.
    35. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
    36. Wernerfelt, Birger, 1997. "On the Nature and Scope of the Firm: An Adjustment-Cost Theory," The Journal of Business, University of Chicago Press, vol. 70(4), pages 489-514, October.
    37. 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.
    38. Erin Anderson & David C. Schmittlein, 1984. "Integration of the Sales Force: An Empirical Examination," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 385-395, Autumn.
    39. Patrick Rey & Joseph Stiglitz, 1995. "The Role of Exclusive Territories in Producers' Competition," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 431-451, Autumn.
    40. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347-347.
    41. Levin, Richard C., 1981. "Vertical integration and profitability in the oil industry," Journal of Economic Behavior & Organization, Elsevier, vol. 2(3), pages 215-235, September.
    42. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-991, September.
    43. Lafontaine, Francine & Bhattacharyya, Sugato, 1995. "The role of risk in franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 39-74, October.
    44. Cooper, James C. & Froeb, Luke M. & O'Brien, Dan & Vita, Michael G., 2005. "Vertical antitrust policy as a problem of inference," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 639-664, September.
    45. Weiss, Avi, 1992. "The Role of Firm-Specific Capital in Vertical Mergers," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 71-88, April.
    46. Slade, Margaret E, 1998. "Strategic Motives for Vertical Separation: Evidence from Retail Gasoline Markets," Journal of Law, Economics, and Organization, Oxford University Press, vol. 14(1), pages 84-113, April.
    47. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
    48. Jack A. Nickerson & Brian S. Silverman, 2003. "Why aren't all Truck Drivers Owner-Operators? Asset Ownership and the Employment Relation in Interstate for-hire Trucking," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 91-118, March.
    49. Waterman, David & Weiss, Andrew A., 1996. "The effects of vertical integration between cable television systems and pay cable networks," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 357-395.
    50. Kerkvliet, Joe, 1991. "Efficiency and Vertical Integration: The Case of Mine-Mouth Electric Generating Plants," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 467-482, September.
    51. Muris, Timothy J & Scheffman, David T & Spiller, Pablo T, 1992. "Strategy and Transaction Costs: The Organization of Distribution in the Carbonated Soft Drink Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 83-128, Spring.
    52. McBride, Mark E, 1983. "Spatial Competition and Vertical Integration: Cement and Concrete Revisited," American Economic Review, American Economic Association, vol. 73(5), pages 1011-1022, December.
    53. Minkler, Alanson P., 1990. "An empirical analysis of a firm's decision to franchise," Economics Letters, Elsevier, vol. 34(1), pages 77-82, September.
    54. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
    55. Ricard Gil, 2009. "Revenue Sharing Distortions and Vertical Integration in the Movie Industry," Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(2), pages 579-610, October.
    56. Anderson, Erin, 1988. "Transaction costs as determinants of opportunism in integrated and independent sales forces," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 247-264, April.
    57. Helfat, Constance E & Teece, David J, 1987. "Vertical Integration and Risk Reduction," Journal of Law, Economics, and Organization, Oxford University Press, vol. 3(1), pages 47-67, Spring.
    58. Lutz, Nancy A., 1995. "Ownership rights and incentives in franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 103-131, October.
    59. Gould, J R, 1977. "Price Discrimination and Vertical Control: A Note," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 1063-1071, October.
    60. Masten, Scott E, 1988. "A Legal Basis for the Firm," Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 181-198, Spring.
    61. Andrea Shepard, 1993. "Contractual Form, Retail Price, and Asset Characteristics in Gasoline Retailing," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 58-77, Spring.
    62. Holmstrom, Bengt, 1999. "The Firm as a Subeconomy," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(1), pages 74-102, April.
    63. Reiffen, David & Kleit, Andrew N, 1990. "Terminal Railroad Revisited: Foreclosure of an Essential Facility or Simple Horizontal Monopoly?," Journal of Law and Economics, University of Chicago Press, vol. 33(2), pages 419-438, October.
    64. McMillan, John & Woodruff, Christopher, 1999. "Dispute Prevention without Courts in Vietnam," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(3), pages 637-658, October.
    65. Klein, Benjamin & Murphy, Kevin M, 1997. "Vertical Integration as a Self-Enforcing Contractual Arrangement," American Economic Review, American Economic Association, vol. 87(2), pages 415-420, May.
    66. Masten, Scott E. & Meehan, James Jr. & Snyder, Edward A., 1989. "Vertical integration in the U.S. auto industry : A note on the influence of transaction specific assets," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 265-273, October.
    67. Perry, Martin K, 1978. "Vertical Integration: The Monopsony Case," American Economic Review, American Economic Association, vol. 68(4), pages 561-570, September.
    68. Lafontaine, Francine & Slade, Margaret E., 1996. "Retail contracting and costly monitoring: Theory and evidence," European Economic Review, Elsevier, vol. 40(3-5), pages 923-932, April.
    69. Kenneth Edwards & John D. Jackson & Henry L. Thompson, 2000. "A Note on Vertical Integration and Stock Ratings of Oil Companies in the U.S," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 145-151.
    70. Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 403-417, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Vertical integration ; firm boundaries ; vertical mergers ; firms versus markets;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wrk:warwec:799. 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: (Margaret Nash). General contact details of provider: http://edirc.repec.org/data/dewaruk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.