Vertical Integration, Supplier Behavior, and Quality Upgrading Among Exporters

67 Pages Posted: 2 Jan 2018 Last revised: 23 Jul 2018

See all articles by Christopher Hansman

Christopher Hansman

Imperial College Business School

Jonas Hjort

Columbia Business School - Finance and Economics

Gianmarco León Ciliotta

Universitat Pompeu Fabra and Barcelona GSE; Barcelona Graduate School of Economics (Barcelona GSE); Institute for Political Economy and Governance, Barcelona; CEPR

Matthieu Teachout

Columbia University

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Date Written: December 2017

Abstract

We study the relationship between firms’ output quality and their choice of organizational structure. To do so, we use data on each step of the production and transaction chain that makes up Peruvian fishmeal manufacturing. We first show that quality upgrading is an important motive for vertically integrating. Firms integrate suppliers when the quality premium—the relative price of high quality output—rises for exogenous reasons, but not when average or low quality prices rise. The greater a firm’s scope for shifting low to high quality production, the greater its integration response. We then show that integration changes suppliers’ production behavior. A given supplier’s actions are less geared towards increasing quantity and more geared towards maintaining input quality after the supplier is integrated and loses access to alternative pay-per-kilo buyers. Finally, we show that firms and individual plants that use integrated suppliers at the time of production ultimately produce a significantly higher share of high quality output. In sum, our results suggest that firms change their organizational structure when their output quality objectives change because controlling the incentives of independent suppliers facing a quantity-quality trade-off is difficult, as classical theories of the firm predict.

JEL Classification: D2, O1

Suggested Citation

Hansman, Christopher and Hjort, Jonas and León Ciliotta, Gianmarco and Teachout, Matthieu, Vertical Integration, Supplier Behavior, and Quality Upgrading Among Exporters (December 2017). CEPR Discussion Paper No. DP12518, Available at SSRN: https://ssrn.com/abstract=3095568

Christopher Hansman (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://chrishansman.com/

Jonas Hjort

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Gianmarco León Ciliotta

Universitat Pompeu Fabra and Barcelona GSE ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(+34) 93 542-1757 (Phone)
(+34) 93 542-1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/gianmarcoleon/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas 25-27
Barcelona, Catalonia 08014
Spain

Institute for Political Economy and Governance, Barcelona ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

CEPR ( email )

London
United Kingdom

Matthieu Teachout

Columbia University

3022 Broadway
New York, NY 10027
United States

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