Title

Vertical Integration, Networks, and Markets]

Document Type

Discussion Paper

Publication Date

7-1-1999

CFDP Number

1231

CFDP Pages

43

Abstract

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.

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