Integration versus outsourcing in industry equilibrium

Gene M. Grossman, Elhanan Helpman

Research output: Contribution to journalArticlepeer-review

488 Scopus citations

Abstract

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 specialized component. Vertically integrated firms can manufacture the components they need, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but search for partners is costly, and input suppliers face a potential holdup problem. We study the determinants of the equilibrium mode of organization when inputs are fully or partially specialized.

Original languageEnglish (US)
Pages (from-to)85-120
Number of pages36
JournalQuarterly Journal of Economics
Volume117
Issue number1
DOIs
StatePublished - Feb 2002

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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