Working Paper: NBER ID: w7303
Authors: Gene M. Grossman; Elhanan Helpman
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.
Keywords: No keywords provided
JEL Codes: D23; D43; D51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| type of firm organization (vertical integration) (L22) | production efficiency (D24) |
| specialized firms (L84) | production costs (D24) |
| degree of competition (L13) | firm structure (L10) |