Outsourcing and Vertical Integration in a Competitive Industry

We develop a partial equilibrium, perfectly competitive framework of a (potentially) vertically integrated industry. There are three types of firms: upstream firms that use primary factors to produce an intermediate good; downstream firms that use primary factors and intermediate goods to produce a...

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Bibliographic Details
Published in:Southern economic journal 2011-04, Vol.77 (4), p.885-900
Main Authors: Ciliberto, Federico, Panzar, John C.
Format: Article
Language:English
Subjects:
Business management
Capital costs
Competition
Competitiveness
Cost function
Costs
Demand functions
Economic aspects
Economies of scale
Economies of scope
Equilibrium
F11
Final goods
Fixed costs
Industrial market
Industrial output
Industrial production
Industrial structure
Intermediate goods
L11
L22
Manufacturing industry
Market equilibrium
Organizational structure
Outsourcing
Production management
Specialization
Studies
Subcontracting
Vertical integration
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Summary:We develop a partial equilibrium, perfectly competitive framework of a (potentially) vertically integrated industry. There are three types of firms: upstream firms that use primary factors to produce an intermediate good; downstream firms that use primary factors and intermediate goods to produce a final good; and vertically integrated firms that do both. We establish conditions under which vertically integrated firms exist and outsource (part of) the production of the intermediate input. We study the changes in industry configurations resulting from changes in costs and demand.
ISSN:0038-4038
2325-8012
DOI:10.4284/0038-4038-77.4.885