Outsourcing and Vertical Integration in a Competitive Industry
23 Pages Posted: 12 Aug 2009 Last revised: 18 Apr 2012
Date Written: April 1, 2011
We develop a partial equilibrium, perfectly competitive framework of a (potentially) vertically oriented industry. There are three types of firms: Upstream firms that use primary factors to produce an intermediate; downstream firms that use primary factors and intermediates 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.
Keywords: Competitive Industry, Vertical Integration, Outsourcing
JEL Classification: F11, L11, L22
Suggested Citation: Suggested Citation