Abstract
This chapter discusses the vertical integration under uncertainty. The role that uncertainty plays in influencing the decisions of firms to integrate vertically is both diverse and pervasive. It is found that the myriad sources of uncertainty that are typically encountered can create a host of incentives for vertical integration that are independent of traditional transaction cost considerations. The study is concerned primarily with vertical integration in agricultural product markets and views vertical integration as a method for reducing the variability of supply and/or demand at vertically related stages of production. As such variability imposes real resource costs in the form of stockpiles, insurance schemes, and product spoilage, any reduction obtained increases the profits of one or more of the parties to the transaction. The extent of the variation that is experienced in the absence of vertical integration is directly related to the perishability of the product and the discreteness of the production process involved.
Published Version
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