Vertically Disintegrated Research Articles

Intellectual property, technorents and the labour share of production

How does the capture of explicit monopoly rent via intellectual property rights interact with the capture of additional profit via monopsonistic labour markets, and with what consequences? Most analyses of changes in the labour market focus on the distributional struggle between capital and labour over the wage share. This paper examines how the distributional struggle among firms over shares of aggregate profit has affected the labour market, generating rising income inequality. Over the past 40 years, struggles over shares of the value generated in a given commodity chain have driven de jure but not de facto vertical disintegration of those value chains. Firms vertically disintegrated by outsourcing non-core production and support activities, by in-sourcing contingent labour, and, where possible, by adopting a franchise model of corporate organization. The franchise model enables core firms to exert near total control over firms that are technically separate legal entities, while avoiding legal and social responsibility for the workers (and owners) of those subordinate firms. Vertical disintegration has produced three ideal typical kinds of firms whose differing ability to capture value and thus profit stems from their different forms of control over other firms in the value chain. Vertical disintegration generated labour shedding and employment contingency. Differential value capture has concentrated profit into firms with relatively small headcounts, reducing the degree to which profits are (partially) redistributed among workers.

Vertical (Dis\u2011)Integration and Firm Performance: A\xa0Management Paradigm Revisited

Vertical disintegration in manufacturing industries has been an increasing trend since the 1990s in many countries. According to a prevailing management paradigm of focusing on core competencies, firms should have vertically disintegrated (i.e. outsourced non-core competencies) to achieve cost savings, enhance competitiveness and improve firm performance. In line with this management paradigm, most empirical studies therefore hypothesized a negative linear relationship between the degree of vertical integration and firm performance, expecting performance to rise when vertical integration decreases.In contrast to previous studies, finding mixed results, we assume an inverted u‑shaped relationship, theoretically based on transaction cost economics and the resource-based view of the firm, and by considering advantages and disadvantages of vertical integration, with an optimal level of vertical integration, where firms with a too low degree of vertical integration could achieve higher performance by vertical integration, while firms with too broad vertical integration could achieve higher performance by vertical disintegration.With respect to our data based on a sample of 434 German manufacturing firms between 1993 and 2013 we find a decreasing trend of vertical integration over time. Applying multiple regression analysis, our findings suggest a positive, but diminishing relationship between the degree of vertical integration and financial performance. These two findings describe a paradox of vertical disintegration. The decreasing trend mainly emerges because lower performing firms outsourced their activities significantly whereas high performing firms do not show such a development. Overall, our results indicate that German manufacturing firms might have gone too far in in their vertical disintegration strategy by following a management paradigm which needs much more critical reflection.

Vertically Disintegrated Platforms

Understanding the implications of digital platform strategies on user welfare has become a crucial issue for policy makers and economists alike. In payments, distributed ledger technologies such as the blockchain have introduced new models of platform governance in the form of vertically disintegrated platforms (VDP). In this paper, we develop a framework to study the implications of vertical disintegration on user welfare. A VDP mediates between users and processors that enable interactions between users. The VDP controls the price structure but the price level is set in a competitive equilibrium between processors; proceeds from operating the platform service are split between processors and the VDP. We find that the welfare ordering between traditional (integrated) and disintegrated platforms crucially depends on the platform cost structure and the regulatory conditions in the market for processors. When the cost of integrating processors depends on the transaction volume, the VDP can produce higher welfare. In contrast, when this cost is fixed, an unregulated VDP is less desirable than the integrated platform. However, regulatory limits on the VDP power over processors can make user welfare under a VDP dominate. Within our framework, we analyze recent applications in the payment industry, including central bank digital currencies, and show how different design choices affect user welfare.

Pitfalls in Private and Social Incentives of Vertical Cross‐border Integration and Disintegration

AbstractProduction increasingly takes place on a cross‐border basis along two patterns. Either a vertically integrated (VI) multinational firm (MNF) spreads the production sequence over many countries or vertically disintegrated (VD) firms operate independently in distinct stages and countries. On the private side, the decrease of transport costs expands VD, due to incentives alternatively in the upstream (U) and the downstream (D) sections of production. With VD the benefits are disseminated over many countries. With VI they are skewed towards a single area. Then, some countries prefer cross‐border VD. In an international duopoly setting, with vertical restraints due to competition or trade policies, VD becomes the privately preferred mode and provides further ground for the wave of international fragmentation.

The Division of Labor is Limited by the Extent of the Market? The Counter-case of the Okayama Farm-engine Industrial District in Japan

The purpose of this paper is to understand how industry organization evolves under conditions of a growing market. Since Adam Smith the traditional argument has claimed that as a market grows, a vertically disintegrated industry organization evolves, and that this enhances productivity. However, the question remains whether the market alone can select an efficient industry organization. This paper analyzes a case from the Japanese farm-engine industry of the 1950s, namely the industrial district of Okayama, where the breakthrough into disintegrated production was never achieved, despite rapid growth in the domestic market for agricultural engines. This led to the collapse of the district. The analysis shows that, if vertical disintegration requires radical changes in the technological competence of each firm, the market does not necessarily offer sufficient incentives for vertical disintegration, even under conditions of a growing market.

The Limits of Flexibility: the Case of UK Television

The organization of the UK television industry has undergone radical change in the last ten years in response to a concerted programme of regulatory change and rapid technological development. It has been seen by some commentators as an exemplar of flexible specialization and of further evidence that mass production methods have become increasingly obsolescent. Vertically disintegrated, flexibly specialized forms of organization are, on this view, best placed to cope with increasing product diversity, competition and uncertainty. This paper argues that the experience of television in the UK bears little resemblance to the model of flexible specialization. Indeed, the response of firms to changing product market conditions has not been to embrace vertical disintegration but to re‐establish traditional organizational structures. Transaction‐costs analysis, while providing a number of useful insights into the development of organizational structures within television, also fails to take account of the complex web of forces determining the degree of horizontal and vertical integration in the sector.

The City as Studio; The World as Back Lot: The Impact of Vertical Disintegration on the Location of the Motion Picture Industry

Motion picture production is currently carried out by small firms under contract to an independent producer rather than in large integrated firms, the major studios. In this paper the emergence of this vertically disintegrated industry is traced and its impact on the location of the motion picture industry is analyzed. Vertical disintegration has led to a reagglomeration of motion picture employment and establishments in Los Angeles, despite the dispersal of film shooting throughout the world. The processes that are shaping the present-day organization of motion pictures can be observed across a range of industries. An examination of these processes in motion pictures suggests that their association with reagglomeration in urban centers could have an important impact on patterns of urbanization.