Industry Change Through Vertical Disintegration: How and Why Markets Emerged in Mortgage Banking

Abstract

This paper provides an inductive theoretical framework that explains how and why vertical disintegration happens, showing that transaction costs are an incidental feature of industry evolution. I find that gains from intrafirm specialization set off a process of intraorganizational partitioning, which simplifies coordination along parts of the value chain. Likewise, latent gains from trade foster interfirm cospecialization, which leads to information standardization. Given standardized information and simplified coordination, new intermediate markets emerge, breaking up the value chain, allowing new types of vertically specialized firms to participate in an industry, and changing the industry's competitive landscape. 2005 469 Jacobides

The architecture of transaction networks: a comparative analysis of hierarchy in two sectors

“…It is well known that firms' decisions to integrate or specialize, when widely adopted, lead to vertically integrated or horizontally layered industry structures (see, for example, Baldwin and Clark, 2000;Jacobides, 2005;and Fixson and Park, 2008). However, studies at the firm level, starting with Harrigan (1985), have shown that the boundary and scope decisions of firms are often more complex than simply to integrate or specialize.…”

“…A number of studies at the sector level have explored how the internal boundaries of industries change and how intermediate markets emerge or disappear (Baldwin and Clark, 2000;Jacobides, 2005;Fixson and Park, 2008). Drawing on the engineering and product design literatures, defined "industry architecture" as a somewhat stable but evolving set of relationships that organize production and innovation processes in a sector.…”

“…In particular, component modularity coupled with high rates of component innovation may 3 motivate firms to specialize in particular segments of the value chain and can lead to vertical disintegration (Baldwin and Clark, 2000;Jacobides, 2005).…”

The power of integrality: Linkages between product architecture, innovation, and industry structure

“…Others have used the related bicycle industry for insightful studies (Randall and Ulrich 2001;Ulrich and Ellison 2005). Finally, despite the significant changes in product architecture and industry composition, this industry exhibited a relatively stable industry boundary during the study period which enables better control for industry-level factors on competition (Dalziel 2005;Jacobides 2005). …”

“…A substantial literature body suggests that many products are becoming more modular over time, and that this development is often associated with a change in industry structure towards higher degrees of specialization (Sanchez and Mahoney 1996;Langlois 2002;Jacobides 2005).…”