Journal of European Economic Association; Institute for Fiscal Studies Working Paper 04/34, 2004
This paper looks at how technology-focused firms relate to other firms.
Whether firms are likely to combine operations with suppliers and producers depends on costs savings and other factors. Vertically integrated firms do not seem to be disadvantaged by more competition.
- Firms that develop technology can vertically integrate by combining operations with suppliers, producers, or with distributors.
- Both transaction costs theory and property rights theory try to explain vertical integration. Transaction costs theory explains that vertical integration can avoid difficulties that firms face in dealing with outsider trying to drive a hard bargain. But neither theory explains all the data well.
- Data from United Kingdom and the United States shows that:
- If the suppliers focus many resources on technology development, integration with developers is less likely. If producers focus many resources on development, integration is more likely.
- This is especially true if the suppliers account for a large portion of producers’ costs, because then the producer is more concerned the supplier will try to drive a hard bargain.
- Vertical integration is more likely when there are many producers compared to the number of suppliers.
- The popular press suggests that competition is reducing the number of vertically integrated firms, but the data does not support this.