Do Prices Determine Vertical Integration

By Laura Alfaro, P. Conconi, Harald Fadinger, Andrew F. Newman. 2016

126 citations recorded by the source corpus.

A number of theories in organizational economics and industrial organization suggest that vertical integration, while costly, increases productivity. It follows from firms’ maximizing behavior that higher prices in the product market ought to induce more integration. Trade policy provides a source of exogenous price variation to assess this prediction: higher tariffs should lead to higher prices and therefore to more integration. We construct firm- level vertical integration indices for a large set of countries and industries and exploit variation in applied MFN tariffs to examine the impact of tariffs on firm boundaries. The empirical results provide strong support for the view that higher output prices generate more vertical integration. Our estimates of the average price elasticity of vertical integra- tion are in the range 0.4-2.

Subfields: Economics and Econometrics

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