IDEAS home Printed from https://ideas.repec.org/p/ifs/ifsewp/06-12.html
   My bibliography  Save this paper

The U-shaped relationship between vertical integration and competition: theory and evidence

Author

Listed:
  • Philippe Aghion

    (Institute for Fiscal Studies and London School of Economics)

  • Rachel Griffith

    (Institute for Fiscal Studies and University of Manchester)

  • Peter Howitt

    (Institute for Fiscal Studies and Brown University)

Abstract

This paper considers how competition can affect aggregate innovative activity through its effects on firms' decision whether or not to vertically integrate. A moderate increase in competition enhances innovation incentives, too much competition discourages innovative effort. These effects generates an inverted-U relationship between competition and innovation and between competition and the incentive to vertically integrate. Preliminary evidence finds that there is a non-linear relationship between competition and the propensity of firms to vertically integrate. These results seem to be more consistent with the Property Right Theory (PRT) of vertical integration than with the Transaction Cost Economics (TCE) approach.

Suggested Citation

  • Philippe Aghion & Rachel Griffith & Peter Howitt, 2006. "The U-shaped relationship between vertical integration and competition: theory and evidence," IFS Working Papers W06/12, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:06/12
    as

    Download full text from publisher

    File URL: http://www.ifs.org.uk/wps/wp0612.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    2. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    3. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    4. Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2010. "Vertical Integration and Technology: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 8(5), pages 989-1033, September.
    5. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    6. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-185, March.
    7. Klein, Benjamin, 1988. "Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 199-213, Spring.
    8. Caves, Richard E. & Bradburd, Ralph M., 1988. "The empirical determinants of vertical integration," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 265-279, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rachel Griffith & John Van Reenen, 2021. "Product market competition, creative destruction and innovation," IFS Working Papers W21/43, Institute for Fiscal Studies.
    2. Thomas Hutzschenreuter & Florian Gröne, 2009. "Changing Vertical Integration Strategies under Pressure from Foreign Competition: The Case of US and German Multinationals," Journal of Management Studies, Wiley Blackwell, vol. 46(2), pages 269-307, March.
    3. Kilinc, U., 2010. "Measuring competition in a frictional economy," Serie Research Memoranda 0012, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    4. Luigi Pascali, 2009. "Contract Incompleteness, Globalization and Vertical Structure: an Empirical Analysis," Boston College Working Papers in Economics 727, Boston College Department of Economics.
    5. Macchiavello, Rocco, 2006. "Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence," CEPR Discussion Papers 5903, C.E.P.R. Discussion Papers.
    6. Kuo-Feng Huang & Chwo-Ming Yu, 2011. "The effect of competitive and non-competitive R&D collaboration on firm innovation," The Journal of Technology Transfer, Springer, vol. 36(4), pages 383-403, August.
    7. Faisal Khurshid & Woo‐Yong Park & Felix T. S. Chan, 2020. "The impact of competition on vertical integration: The role of technological niche width," Business Strategy and the Environment, Wiley Blackwell, vol. 29(3), pages 789-800, March.
    8. Alena Zemplinerova, 2010. "Competition policy and economic analysis: What can we learn from firm and industry data?," CERGE-EI Books, The Center for Economic Research and Graduate Education - Economics Institute, Prague, edition 1, number b07, May.
    9. Kilinc, U., 2010. "Price-cost markups and productivity dynamics of entrant plants," Serie Research Memoranda 0011, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    10. Candiani, Juan Antonio & Gilsing, Victor & Mastrogiorgio, Mariano, 2022. "Technological entry in new niches: Diversity, crowding and generalism," Technovation, Elsevier, vol. 116(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2010. "Vertical Integration and Technology: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 8(5), pages 989-1033, September.
    2. Li, Ben & Lu, Yi, 2009. "Geographic concentration and vertical disintegration: Evidence from China," Journal of Urban Economics, Elsevier, vol. 65(3), pages 294-304, May.
    3. Laura Alfaro & Nick Bloom & Paola Conconi & Harald Fadinger & Patrick Legros & Andrew F Newman & Raffaella Sadun & John Van Reenen, 2024. "Come Together: Firm Boundaries and Delegation," Journal of the European Economic Association, European Economic Association, vol. 22(1), pages 34-72.
    4. Wang, Sen & Bogle, Tim & van Kooten, G. Cornelis, 2012. "Forestry and the New Institutional Economics," Working Papers 130818, University of Victoria, Resource Economics and Policy.
    5. Juan Carluccio & Thibault Fally, 2012. "Global Sourcing under Imperfect Capital Markets," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 740-763, August.
    6. Daron Acemoglu & Simon Johnson & Todd Mitton, 2005. "Determinants of Vertical Integration: Finance, Contracts, and Regulation," NBER Working Papers 11424, National Bureau of Economic Research, Inc.
    7. Seitz, Michael & Watzinger, Martin, 2017. "Contract enforcement and R&D investment," Research Policy, Elsevier, vol. 46(1), pages 182-195.
    8. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1445-1488, December.
    9. Stefany Moreno Burbano, 2016. "Estructura vertical de la industria manufacturera colombiana entre 1990 - 2013," Borradores de Economia 925, Banco de la Republica de Colombia.
    10. Laura Alfaro & Paola Conconi & Harald Fadinger & Andrew F. Newman, 2010. "Do Prices Determine Vertical Integration? Evidence from Trade Policy," Harvard Business School Working Papers 10-060, Harvard Business School, revised May 2013.
    11. Stiebale, Joel & Vencappa, Dev, 2022. "Import competition and vertical integration: Evidence from India," Journal of Development Economics, Elsevier, vol. 155(C).
    12. Bigelow, Lyda S. & Argyres, Nicholas, 2008. "Transaction costs, industry experience and make-or-buy decisions in the population of early U.S. auto firms," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 791-807, June.
    13. Luigi Pascali, 2009. "Contract Incompleteness, Globalization and Vertical Structure: an Empirical Analysis," Boston College Working Papers in Economics 727, Boston College Department of Economics.
    14. Johnson, William C. & Karpoff, Jonathan M. & Yi, Sangho, 2015. "The bonding hypothesis of takeover defenses: Evidence from IPO firms," Journal of Financial Economics, Elsevier, vol. 117(2), pages 307-332.
    15. Philippe Aghion & Rachel Griffith & Peter Howitt, 2006. "Vertical Integration and Competition," American Economic Review, American Economic Association, vol. 96(2), pages 97-102, May.
    16. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    17. Schmid, Andreas, 2007. "Incentive Compatibility and Efficiency in the contractual Insurer-Provider Relationship: Economic Theory and practical Implications: The Case of North Carolina," MPRA Paper 23311, University Library of Munich, Germany, revised 2008.
    18. Oliver Hart, 2013. "Noncontractible Investments and Reference Points," Games, MDPI, vol. 4(3), pages 1-20, August.
    19. Dermot Leahy & Catia Montagna, 2006. "'Make-or-Buy' in International Oligopoly and the Role of Competitive Pressure," Dundee Discussion Papers in Economics 197, Economic Studies, University of Dundee.
    20. Christopher Hansman & Jonas Hjort & Gianmarco León-Ciliotta & Matthieu Teachout, 2020. "Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3570-3625.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ifs:ifsewp:06/12. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emma Hyman (email available below). General contact details of provider: https://edirc.repec.org/data/ifsssuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.