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Vertical Integration

In: Handbook of New Institutional Economics

Author

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  • Paul L. Joskow

    (Massachusetts Institute of Technology)

Abstract

This essay reviews research that examines the choice between governance of vertical relationships involving suppliers of intermediate goods and services (“upstream”) and the purchasers of those goods and services (“downstream”) through some form of market-based contractual arrangement versus governance based on internalization of these transactions within a single hierarchical organization through vertical integration. The emphasis is on the transaction cost economics (TCE) framework for understanding the choice of governance arrangements, though I will briefly discuss several other theories of vertical integration as well. The general comparative governance framework that is a basic feature of transaction cost economics (TCE) analysis is discussed first. The essay then proceeds to discuss traditional “neoclassical” theories of vertical integration that rely on various market imperfections including market power, double marginalization, free riding, uncertainty, and economies of scale as explanations. A discussion of theories of vertical integration from a TCE perspective, focusing on the role of incomplete contracts and relationship-specific investment, follows. The essay concludes with a brief discussion of the extensive empirical literature on vertical integration, focusing on key methodological issues.

Suggested Citation

  • Paul L. Joskow, 2025. "Vertical Integration," Springer Books, in: Claude Ménard & Mary M. Shirley (ed.), Handbook of New Institutional Economics, edition 0, chapter 18, pages 417-446, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-50810-3_18
    DOI: 10.1007/978-3-031-50810-3_18
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