Integration versus Outsourcing in Industry Equilibrium

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 specialized co...

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Bibliographic Details
Published in:The Quarterly journal of economics 2002-02, Vol.117 (1), p.85-120
Main Authors: Grossman, Gene M., Helpman, Elhanan
Format: Article
Language:English
Subjects:
Capital costs
Economic models
Economic theory
Equilibrium
Final goods
Fixed costs
Increasing returns
Industrial products
Industry
Input output analysis
Integration
Market equilibrium
Outsourcing
Producer surplus
Production costs
Vertical integration
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Summary: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 specialized component. Vertically integrated firms can manufacture the components they need, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but search for partners is costly, and input suppliers face a potential holdup problem. We study the determinants of the equilibrium mode of organization when inputs are fully or partially specialized.
ISSN:0033-5533
1531-4650
DOI:10.1162/003355302753399454