On Synergies and Vertical Integration

20 Pages Posted: 25 Nov 2007

See all articles by Patrick W. Schmitz

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

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Abstract

We analyze in an incomplete contracts model whether a supplier should be integrated if in addition to his investment level he may choose the intensity of specialization towards the needs of the buyer. A basic trade-off arises: While non-integration may lead to higher investment incentives, potential synergies are foregone. Hence, integration may be optimal even though only the supplier has to make an investment decision. Furthermore we show that if in addition to asset ownership the degree of specialization is contractible both parties will deliberately agree on an inefficiently low level of specialization since this improves investment incentives.

Suggested Citation

Schmitz, Patrick W. and Sliwka, Dirk, On Synergies and Vertical Integration. Available at SSRN: https://ssrn.com/abstract=1032134 or http://dx.doi.org/10.2139/ssrn.1032134

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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