Vertical Integration Choices Research Articles

Measuring the input rank in global supply networks

AbstractWe introduce the Input Rank as a network measure of relevance of direct and indirect suppliers in Global Value Chains. We conceive an intermediate input to be more relevant for a downstream buyer if a negative shock to that input's productivity affects that buyer more. In particular, in our framework, the relevance of any input depends on: (i) the network position of the supplier relative to the buyer, (ii) the patterns of intermediate input intensities connecting the buyer and the supplier, and (iii) the competitive pressures along supply chains. After we compute the Input Rank from both the U.S. and the world input–output tables, we provide useful insights into the crucial role of services inputs as well as on the relatively higher relevance of domestic suppliers, and suppliers coming from regionally integrated partners. Finally, we test that the Input Rank is a good predictor of vertical integration choices made by 20,489 U.S. parent companies controlling 154,836 subsidiaries worldwide.

Measuring the Input Rank in Global Supply Networks

We introduce the Input Rank as a measure of relevance of direct and indirect suppliers in Global Value Chains. We conceive an intermediate input to be more relevant for a downstream buyer if a decrease in that input’s productivity affects that buyer more. In particular, in our framework, the relevance of any input depends on: i) the network position of the supplier relative to the buyer, ii) the patterns of intermediate inputs intensities connecting the buyer and the supplier, iii) and the competitive pressures along supply chains. After we compute the Input Rank from both U.S. and world Input-Output tables, we provide useful insights on the crucial role of services inputs as well as on the relatively higher relevance of domestic suppliers and suppliers coming from regionally integrated partners. Finally, we test that the Input Rank is a good predictor of vertical integration choices made by 20,489 U.S. parent companies controlling 154,836 subsidiaries worldwide.

Integration of Hospitals and Post-Acute Care Providers and the Cost of Care

Hospitals are facing incentives to manage the total cost of care for episodes of illness including the costs of inpatient care as well as the cost of care provided by physicians and post-acute care (PAC) providers. PAC is an especially important component of the overall cost of care. One strategy hospitals may employ in managing this cost is vertically integrating with PAC providers. Prior work has isolated the effects of particular combinations of these strategies, primarily the effects of SNF ownership on cost and quality outcomes. In contrast, relatively little research has compared different forms of integration. We examine data from the American Hospital Association for 2013-2014 and find that a majority of hospitals are engaging in some form of vertical integration and many hospitals maintain both ownership and network affiliation relationships with multiple types of PAC providers. Next, we use data from CMS’ Value Based Purchasing Program to examine the relationship between a hospital’s vertical integration choices and the average cost of an acute and post-acute episode of care for a hospital’s patients. We find that costs do not vary consistently by type of vertical integration (network affiliation vs. ownership) or by PAC provider type, but particular combinations of these characteristics are associated with a lower episodic cost of care.

Vertical integration in the Brazilian orange juice sector: power and transaction costs

This paper aims to investigate the role of market power on vertical integration choices in the Brazilian orange juice sector. The main hypothesis states that market power, along with economizing drivers, has had an important role in the economic organization of the orange juice sector. In order to accomplish this task, we examine the make-or-buy decision of juice-processing firms in procurement of inputs (fruits), through a 15-year panel of five firms (more than 90% of the market). Empirical results offer new theoretical insights on role of market power in vertical integration decision. From these theoretical advancements, as implications for practitioners, market power raises attention for critical strategizing issues and antitrust remedies.

Revisiting Theories of Governance for Last-Mile Supply Networks in Omnichannel Retailing

Omnichannel fulfillment strategies are driving significant change in the retail sector. We investigate how retailers govern their supply networks to support e-commerce development of last-mile delivery. While Transaction Cost Economics (TCE) and the Resource-Based View (RBV) have been applied to understanding a firm’s vertical integration choices in relatively static manufacturing and professional service environments, their application in the dynamic omnichannel context has received little examination. Using a theory elaboration approach, we use multiple embedded case studies to explore how retailers respond to the presence of transaction costs and capability heterogeneity in the governance of their last mile supply networks. We find a differential mix of transaction cost and resource-based constructs contribute to governance decisions. Results highlight that, by considering the interplay between TCE and RBV, it is possible to reach a more consistent set of predictions on governance choices in a dynamic ...

Vertical Integration, Organizational Governance, and Firm Performance: Evidence from Italian Business Groups

Assuming transaction cost economics as a normative tool, we investigate the relationship between firms' ‘observed’ vertical integration choices and their economic performance. We use a two‐stage methodology: in the first, a measure of governance misalignment is computed as a difference between the governance form (i.e., ownership or outsourcing) predicted by transaction cost economics and the form actually observed; the second stage consists of estimating a performance equation where the misalignment variable is introduced together with a set of independent variables. Compared with previous studies, we introduce two novelties: we use the business group as the unit of analysis to detect the ownership of vertically related productions; we assess the moderating role of geographic agglomeration in reducing the need of vertical integration. Our results confirm the importance of technology and price uncertainty in influencing vertical integration; moreover, the misalignment variable is significant in the case of profitability, but not in the case of growth. Copyright © 2014 John Wiley & Sons, Ltd.

Strategic Delegation and Vertical Integration

This paper proposes a game-theoretic model to analyze owners' vertical integration choices if they delegate pricing decisions to their managers. We find that all three vertical structures are possible Nash equilibrium outcomes. If the products are weak substitutes, then the outcome is that both owners adopt vertical integration. When the products are close substitutes, both owners adopt vertical separation in equilibrium. When substitution between the products is medium, the coexistence of vertical integration and vertical separation is the equilibrium outcome, and the owner corresponding to vertical separation offers exactly a profit-maximization contract to his or her manager under this situation. Copyright © 2014 John Wiley & Sons, Ltd.

Risky Business - Uncertain Access to Specialized Complementary Assets, Vertical Integration, and the Commercial Performance of New Products

The present study explores the antecedents and consequences of vertical integration choices in the context of new product development using project-level data from the motion picture industry. I show that uncertain access to specialized complementary assets can generate market failures for certain products, which drive the owners of these assets to vertically integrate into upstream innovation. Furthermore, I explore whether vertical integration affects downstream investments in specialized complementary resources and ultimately, the commercial performance of new products. I find that vertical integration promotes greater commercial success and that this effect is completely mediated by enhanced downstream investments.

Innovation, Modularity, and Vertical Deintegration: Evidence from the Early U.S. Auto Industry

Although vertical integration choices have been found to significantly affect firm performance, there has been little empirical study of how such choices are affected by the stage of industry evolution in which firms find themselves. We empirically investigate two possible impacts of increasing modularity on a firm's vertical integration choices. First, we hypothesize that increasing modularity is associated with vertical deintegration because of the high-level standardization of components that dominant designs tend to promote. Second, we posit that firms selling in higher market segments, because they are attempting to differentiate their products by incorporating unique components with less-modular interfaces with other components, will tend to be more vertically integrated than their lower-price rivals. We find evidence for both of these effects in data from the early U.S. auto industry.

VERTICAL INTEGRATION OVER THE INDUSTRY LIFECYCLE: EVIDENCE FROM THE EARLY U.S. AUTO INDUSTRY.

The article uses emperical analysis to examine several possible impacts of the industry lifecycle on firms' vertical integration choices that operate through their effects on transaction costs, or ...

Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development

This paper examines complementarity among vertical integration decisions in automobile product development. Though most research assumes that contracting choices are independent of each other, contracting complementarity arises when the returns to a single vertical integration decision are increasing in the level of vertical integration associated with other contracting choices. First, effective coordination may depend on the level of (noncontractible) effort on the part of each agent; contracting complementarity results if coordination efforts are interdependent and vertical integration facilitates a higher level of noncontractible effort. Second, effective coordination may require the disclosure of proprietary trade secrets, and the potential for expropriation by external suppliers may induce complementarity among vertical integration choices. We provide evidence for complementarity in product development contracting by taking advantage of a detailed data set that includes the level of vertical integration and the contracting environment for individual automobile systems in the luxury automobile segment. Using an instrumental variables framework that distinguishes complementarity from unobserved firm-level factors, the evidence is consistent with the hypothesis that contracting complementarity is an important driver of vertical integration choices. The findings suggest that contracting complementarity may be particularly important when coordination is important to achieve but difficult to monitor.