Integration vs. Outsourcing in Industry Equilibrium

By Gene M. Grossman, E. Helpman. Social Science Research Network, 2001

533 citations recorded by the source corpus.

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 due to diseconomies of scope. Specialized firms can produce at lower cost, but outsourcing imposes costs due to search frictions and imperfect contracting. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the industry, the nature of the search technology, the division of bargaining strength between intermediate and final producers, and the sensitivity of manufacturing costs to input characteristics affect the equilibrium organizational form.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/761f2dc3e3580bd17d1e42c4a9b1e8038a597a32

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Citations in the corpus

Trade Intermediation and the Organization of Exporters (2011, unknown): “24In Grossman and Helpman (2002), a similar pricing rule emerges in the context of outsourcing with homogeneous firms.”
From Sectoral to Functional Urban Specialization (2001, unknown): “, Grossman and Helpman [20], Marin and Verdier [33], Puga and Trefler [41], Antràs [4]) have developed general equilibrium frameworks where both firms’ organisation and the market structure in which they operate are endogenous.”
Infrastructure and Trade (2004, background): “11 See for example Anderson and van Wincoop (2003b) for an overview.”
Institutional Quality and International Trade (2004, unknown): “The Grossman-Hart-Moore framework has recently been used in international trade literature by Grossman and Helpman (2002b, 2002c, 2003) and Antras (2003, 2004).”
Outsourcing and skill‐specific employment in a small economy: Austria after the fall of the Iron Curtain (2003, background): “6 Grossman and Helpman (2002) stress the importance of imperfect contracting and search costs in the context of fragmentation.”
Incomplete Contracts and the Product Cycle (2005, background): “40This paper is related to an emerging literature on general-equilibrium models of ownership structure (c.f., McLaren, 2000, Grossman and Helpman, 2002a, Antràs, 2003).”
Relationship Specificity, Incomplete Contracts and the Pattern of Trade (2007, background): “…While the initial focus has been on modelling the effect that contract enforcement has on the decisions of multinational firms [McLaren 2000; Grossman and Helpman 2002, 2003, 2005; Antràs 2003; Antràs and Helpman 2004; Ornelas and Turner 2005; Puga and Trefler 2005], more recent studies…”
Firms, Contracts, and Trade Structure (2003, unknown): “AY,O = frβYw1−βY 1− α(1− βY ) + αφ(1− 2βY ) p α/(1−α) Y,O , (15)”
Organizations and Trade (2009, methodology): “McLaren (2000) and Grossman and Helpman (2002) o¤er alternative general-equilibrium formalizations of the transaction-cost approach which instead emphasize ex-ante or holdup ine¢ ciencies.”
Analytical Differences in the Economics of Geography: The Case of the Multinational Firm (2005, background): “These include issues such as the internalisation and pricing of knowledge assets (Markusen, 1984; 2002), the advantages of horizontal (Horstmann and Markusen,1992; Markusen and Venables, 2000) and vertical integration (Aghion and Tirole, 1997; Grossman and Hart, 1986), and the advantages of subcontr”
Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm (2005, methodology): “An example, taken from Grossman and Helpman (2002c), where such effort also affects final sales is when the project is “successful” (leading to positive sales) with some probability that is increasing in e2.”
Institutions and the Path to the Modern Economy: Lessons from Medieval Trade (2006, unknown): “Political institutions and organizations matter, because economic institutions are established and changed through the political process (North 1981, 1990; Barzel 1989; Sened 1997; G. Grossman and Helpman 2002 ).”