Do Prices Determine Vertical Integration?

A number of theories in organizational economics and industrial organization suggest that vertical integration, while costly, increases productivity. It follows from firms' maximizing behaviour that higher prices in the product market ought to induce more integration. Trade policy provides a so...

Full description

Saved in:
Bibliographic Details
Published in:The Review of economic studies 2016-07, Vol.83 (3 (296)), p.855-888
Main Authors: ALFARO, LAURA, CONCONI, PAOLA, FADINGER, HARALD, NEWMAN, ANDREW F.
Format: Article
Language:English
Subjects:
Domestic prices
Economic integration
Imports
Industrial plants
Industrial productivity
Most favored nation
Price elasticity
Prices
Productivity
Studies
Tariffs
Trade policy
Vertical integration
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:A number of theories in organizational economics and industrial organization suggest that vertical integration, while costly, increases productivity. It follows from firms' maximizing behaviour that higher prices in the product market ought to induce more integration. Trade policy provides a source of exogenous price variation to assess this prediction: higher tariffs should lead to higher prices and, therefore, to more integration. We construct firm-level vertical integration indices for a large set of countries and industries and exploit variation in applied most-favoured-nation tariffs to examine the impact of tariffs on firm boundaries. The empirical results provide strong support for the view that higher output prices generate more vertical integration. Our estimates of the average price elasticity of vertical integration are in the range 0.4-2.
ISSN:0034-6527
1467-937X
DOI:10.1093/restud/rdv059