Incomplete Contracts and Industrial Organization

45 Pages Posted: 23 Feb 2000 Last revised: 26 Jul 2000

See all articles by Gene M. Grossman

Gene M. Grossman

Princeton University - Woodrow Wilson School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Elhanan Helpman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1999

Abstract

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 unique, specialized component. Vertically integrated firms can manufacture the components they need in the quantity and type that maximizes profits, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but input suppliers face a potential hold-up problem. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the market and other parameters affect the equilibrium choices, and how the equilibrium compares with the efficient allocation.

Suggested Citation

Grossman, Gene M. and Helpman, Elhanan, Incomplete Contracts and Industrial Organization (August 1999). NBER Working Paper No. w7303. Available at SSRN: https://ssrn.com/abstract=198329

Gene M. Grossman (Contact Author)

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

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Elhanan Helpman

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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