Vertical Integration and Firm Boundaries: The Evidence

Abstract

4 hypotheses that they test. Our motive for discussing the theories is not to produce a comprehensive survey of their richness but rather to provide us with a framework within which to present the evidence. In particular, the evidence that we present is organized around the predictions of simple bare-bones models.Throughout our presentation we discuss some of the measurement challenges that authors face but mostly ignore econometric problems. We do this to keep the overview tractable and of reasonable length. This is not to say that the econometric problems are unimportant. To make this point clear, in each of the two segments we highlight some of the econometric issues that researchers must confront. Since those issues are not always dealt with satisfactorily, one can be skeptical about some of the conclusions that authors have reached. Nevertheless, taken as a body, the evidence is often so strong that it can overcome much of our skepticism.

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

“…Because the literature in this area is vast, we are not able to do it justice here. (See Lafontaine and Slade, 2007 for a useful survey.) Instead we provide a selective review divided into three parts: (1) firm-level studies, (2) sector-level studies, and (3) transaction-network studies.…”

“…It has been shown that firms are more likely to outsource components when their assets are not co-specialized, when the component interfaces are standardized, and when high-powered incentives or property rights improve performance (Lafontaine and Slade, 2007).…”

Cost versus control: Understanding ownership through outsourcing in hospitals

“…While the choice of a forprofit firm to outsource rather than provide services directly is (relatively) well-understood (Lafontaine and Slade 2007), little is known about how nonprofit and public firms make these decisions. The outsourcing decision provides insight into the nonprofit sector, in particular, because the nonprofit may be ceding control to a firm less likely to share its mission.…”

How Can Integration Reduce Inefficiencies Due to Ex Post Adaptation?

“…TCE (e.g., Williamson (1996)) asserts that under bilateral monopoly caused by relationship-specific investment or other factors, while non-integrated parties have to engage in costly negotiations for the ex post adaptations, which leads to bargaining inefficiencies (delay in reaching agreement and bargaining breakdown), integrated firms can implement these by fiat without such costly negotiations. This assertion leads to TCE's main prediction: when a bilateral monopoly arises, firms are likely to choose vertical integration; this is supported by a number of empirical studies (see Lafontaine and Slade (2007) for a survey of these studies).…”

“…Furthermore, this observation is also consistent with empirical studies on TCE. The empirical studies on TCE, such as Monteverde andTeece (1982), Masten (1984), and Joskow (1988) (see Lafontaine and Slade (2007) for the review of these studies),…”