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Does vertical integration increase product quality?

Author

Listed:
  • Sanxi Li

    (Renmin University of China)

  • Xinyu Li

    (University of Groningen)

  • Zhan Qu

    (University of Göttingen)

Abstract

Numerous product quality scandals are caused by low-quality inputs. When input quality is not perfectly observed by downstream firms, upstream firms often have moral hazard problems. If vertical integration does not directly eliminate the moral hazard problems, does vertical integration still improve product quality? If so, under which conditions? We find that given the precision of monitoring technology used by downstream firms, when the level of public monitoring is very high or very low, downstream firms have no incentive to integrate upstream firms; when the level is intermediate, downstream firms have incentives to integrate and vertical integration increases product quality.

Suggested Citation

  • Sanxi Li & Xinyu Li & Zhan Qu, 2023. "Does vertical integration increase product quality?," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(1), pages 69-80, April.
    • Handle: RePEc:spr:etbull:v:11:y:2023:i:1:d:10.1007_s40505-022-00240-4
    DOI: 10.1007/s40505-022-00240-4
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    More about this item

    Keywords

    Vertical integration; Asymmetric information; Supply chain; Product quality; Property right;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

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