We bridge the organisational economics and industrial economics literatures on the vertical boundaries of the firm by contextualising the transaction cost approach to the make-or-buy decision within an oligopolistic market structure. Firms invest in the quality of the intermediate resulting in the endogenous determination of the price of the intermediate and marginal production cost of the final good. We highlight new strategic incentives to outsource/vertically integrate and show that firm asymmetries can emerge endogenously, with firms choosing different modes of operation, even when they are ex-ante identical. We apply our model to a number of different international trading setups.
|Name||Discussion Paper in Economics|
|Publisher||University of Aberdeen|
- Vertical Integration
- Trade Liberalisation