Do Prices Determine Vertical Integration? Evidence from Trade Policy

44 Pages Posted: 16 Jun 2010 Last revised: 24 May 2013

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Paola Conconi

Centre for Economic Policy Research (CEPR); Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Harald Fadinger

University of Vienna

Andrew F. Newman

Boston University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: May 24, 2013

Abstract

What is the relationship between product prices and vertical integration? While the literature has focused on how integration affects prices, this paper shows that prices can affect integration. Many theories in organizational economics and industrial organization posit that integration, while costly, increases productivity. If true, it follows from firms' maximizing behavior that higher prices cause firms to choose more integration. The reason is that at low prices, increases in revenue resulting from enhanced productivity are too small to justify the cost, whereas at higher prices, the revenue benefit exceeds the cost. Trade policy provides a source of exogenous price variation to assess the validity of this prediction: higher tariffs should lead to higher prices and therefore to more integration. We construct firm-level indices of vertical integration for a large set of countries and industries and exploit cross-section and time-series variation in import tariffs to examine their impact on firm boundaries. Our empirical results provide strong support for the view that output prices are a key determinant of vertical integration.

Keywords: Theory of the firm, vertical integration, product prices

JEL Classification: D2, L2

Suggested Citation

Alfaro, Laura and Conconi, Paola and Fadinger, Harald and Newman, Andrew F., Do Prices Determine Vertical Integration? Evidence from Trade Policy (May 24, 2013). Harvard Business School BGIE Unit Working Paper No. 10-060. Available at SSRN: https://ssrn.com/abstract=1625503 or http://dx.doi.org/10.2139/ssrn.1625503

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Paola Conconi

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
32 2 650 2345 (Phone)
32 2 650 4475 (Fax)

Harald Fadinger

University of Vienna ( email )

Bruenner Strasse 72
Vienna, Vienna 1090
Austria

Andrew F. Newman

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-358-4354 (Phone)
617-353-4143 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
263
rank
103,799
Abstract Views
1,737
PlumX Metrics