COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1231 Vertical Integration, Networks, and Markets Rachel E. Kranton and Deborah F. Minehart July 1999 The organization of supply relations varies across industries. This paper builds a theoretical framework to compare three alternative supply structures: vertical integration, networks, and markets. The analysis considers the relationship between uncertainty in demand for specific inputs, investment costs, and industrial structure. It shows that network structures are more likely when productive assets are expensive and firms experience large idiosyncratic shocks in demand. The analysis is supported by existing evidence and provides empirical predictions as to the shape of different industries. Keywords: vertical supply, industrial structure, demand uncertainty |
