Vertical Integration, Networks, and Markets
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.
Kranton, Rachel E. and Minehart, Deborah F., "Vertical Integration, Networks, and Markets" (1999). Cowles Foundation Discussion Papers. 1481.