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Outsourcing and Vertical Integration in a Competitive Industry

By Federico Ciliberto and John Panzar

Abstract

We develop a partial equilibrium, perfectly competitive framework of a (potentially) vertically integrated industry. There are three types of firms: upstream firms that use primary factors to produce an intermediate; downstream firms that use primary factors and intermediates to produce a final good; and vertically integrated firms that do both. We establish conditions under which vertically integrated firms exist and outsource (part of) the production of the intermediate input. We study the changes in industry configurations resulting from changes in costs and demand.

Topics: L11 - Production, Pricing, and Market Structure; Size Distribution of Firms, L22 - Firm Organization and Market Structure
Year: 2009
DOI identifier: 10.4284/0038-4038-77.4.885
OAI identifier: oai:mpra.ub.uni-muenchen.de:38628

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