Vertical Integration and Efficiency: an application to the Italian Machine Tool Industry

Fabio Pieri and Enrico Zaninotto ()
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Enrico Zaninotto: DISA, Faculty of Economics, Trento University

No 1006, DISA Working Papers from Department of Computer and Management Sciences, University of Trento, Italy

Abstract: This paper analyzes the relationship between firm efficiency and vertical integration in the Italian machine tool (MT) industry. A theoretical model of entry and competition within an industry has been set up. In this model firms can choose either to be vertically integrated or not: the most efficientfirms self-select in being vertically integrated, while less efficientfirms prefer a disintegrated structure and they both coexist in equilibrium. In the second part of the paper the relationship between efficiency and vertical integration has been tested using a stochastic frontier framework in an novel panel dataset including around 500 MT builders. The theoretical prediction is confirmed: outsourcing seems a rational choice for less efficient firms to make positive operating profits and stay in the market; on the other hand, more efficient firms exploit their efficiency advantage to control a greater part of the production chain, possibly benefiting from greater coordination among different phases and tailored intermediate inputs.

Keywords: vertical integration; technical efficiency; firm heterogeneity; heteroskedastic frontier model (search for similar items in EconPapers)
JEL-codes: D24 L23 L25 L64 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010-11, Revised 2010-11-24
New Economics Papers: this item is included in nep-bec, nep-com, nep-eff, nep-int and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Vertical integration and efficiency: an application to the Italian machine tool industry (2013)
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