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Vertical Integration and Operational Flexibility

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  • Michele, Moretto
  • Gianpaolo, Rossini

Abstract

The main aim of the paper is to highlight the relation between flexibility and vertical integration. To this purpose, we go through the selection of the optimal degree of vertical disintegration of a flexible firm which operates in a dynamic uncertain environment. The enterprise we model enjoys flexibility since it can switch from a certain amount of disintegration to vertical integration and viceversa. This means that the firm never loses vertical control, i.e., the ability to produce all inputs even when it buys them in the market. This sort of flexibility makes for results which are somehow contrary to the Industrial Organization recent literature and closer to the Operations Research results. In this sense we provide a bridge between the two approaches and rescue Industrial Organization from counterintuitive conclusions.

Suggested Citation

  • Michele, Moretto & Gianpaolo, Rossini, 2008. "Vertical Integration and Operational Flexibility," Economic Theory and Applications Working Papers 36759, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemet:36759
    DOI: 10.22004/ag.econ.36759
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    Cited by:

    1. Di Corato, Luca & Moretto, Michele, 2011. "Investing in biogas: Timing, technological choice and the value of flexibility from input mix," Energy Economics, Elsevier, vol. 33(6), pages 1186-1193.
    2. Rossini Gianpaolo & Vergari Cecilia, 2011. "Input Production Joint Venture," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-50, March.

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    More about this item

    JEL classification:

    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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