Networks Versus Vertical Integration

Posted: 31 Jul 2000

See all articles by Rachel Kranton

Rachel Kranton

University of Maryland - Department of Economics

Deborah Minehart

University of Maryland - Department of Economics

Abstract

We construct a theory to compare vertically integrated firms to networks of manufacturers and suppliers. Vertically integrated firms make their own specialized inputs. In networks, manufacturers procure specialized inputs from suppliers that, in turn, sell to several manufacturers. The analysis shows that networks can yield greater social welfare when manufacturers experience large idiosyncratic demand shocks. Individual firms may also have the incentive to form networks, despite the lack of long-term contracts. The analysis is supported by existing evidence and provides predictions as to the shape of different industries.

JEL Classification: L20, L22

Suggested Citation

Kranton, Rachel E. and Minehart, Deborah, Networks Versus Vertical Integration. RAND Journal of Economics, Vol. 31, No. 3, Autumn 2000. Available at SSRN: https://ssrn.com/abstract=235386

Rachel E. Kranton (Contact Author)

University of Maryland - Department of Economics ( email )

3015 Tydings Hall
College Park, MD 20742
United States
(301) 405-3487 (Phone)
(301) 405-3542 (Fax)

Deborah Minehart

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3481 (Phone)
301-405-3542 (Fax)

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