On Synergies and Vertical Integration

Posted: 6 Sep 2001

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 chooses the degree of relationship specificity. A basic trade-off arises: While non-integration leads to higher investment incentives, potential synergies are foregone. Hence, integration can be optimal even though only the supplier makes an investment decision. This may also clarify the discussion on which activities belong to a firm's core competencies. Furthermore, we show that if specificity is contractible, less than the efficient degree of specificity will deliberately be chosen since investment incentives are thereby improved.

Keywords: Vertical integration, incomplete contracts, relationship specificity, core competence, synergies

JEL Classification: L22, L14, D23

Suggested Citation

Schmitz, Patrick W. and Sliwka, Dirk, On Synergies and Vertical Integration. International Journal of Industrial Organization, Vol. 19, No. 8, Pp. 1281-1295, 2001. Available at SSRN: https://ssrn.com/abstract=276771

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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