On Synergies and Vertical Integration

Patrick and Dirk Sliwka Schmitz
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Patrick and Dirk Sliwka Schmitz: Postal: Patrick Schmitz, Dirk Sliwka Wirtschaftspolitische Abteilung University of Bonn Adenauerallee 24-26 53113 Bonn
Authors registered in the RePEc Author Service: Patrick W. Schmitz and Dirk Sliwka

Discussion Paper Serie A from University of Bonn, Germany

Abstract: We analyze in an incomplete contracts model whether a supplier should be integrated if in addition to his investment level he chooses the intensity of specialization towards the buyer's needs. A basic trade-off arises: While non-integration leads to higher investment incentives, potential synergies are foregone. Hence, integration can be optimal even though only the supplier makes an investment decision. This may also yield some insights for the discussion on which activities belong to a firm's core competencies. Furthermore, we show that if specialization is contractible, underspecialization will deliberately be chosen since investment incentives are thereby improved.

Keywords: Synergies; Vertical Integration; Incomplete Contracts; Hold-Up; Specialization (search for similar items in EconPapers)
JEL-codes: D23 L22 (search for similar items in EconPapers)
Date: 1999-07

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Journal Article: On synergies and vertical integration (2001)
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