Integration versus Outsourcing with Vertical Linkages

Gaetano Alfredo Minerva

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: I propose a mechanism for the coexistence of vertical integration and outsourcing within an industry. In a monopolistically competitive model with incomplete contracts, final-good producers under either organizational form combine labor and differentiated inputs to produce fixed capital. Since its unit cost depends on the industry price index, distinct zero-profit conditions can hold, sustaining a mixed free-entry equilibrium. The forms differ in fixed-capital cost per unit of contribution to the price index; this ranking determines comparative statics and whether local stability is possible. I derive a sufficient condition ensuring stability whenever the mixed equilibrium exists. In numerical parameterizations using empirically standard elasticities of substitution, the condition holds throughout the admissible range of vertical-linkage intensity. Within the stable region, larger markets raise the integrated share without changing output prices or supplier bargaining terms. Relative firm size depends on governance costs and upstream bargaining share, so the model imposes no uniform ranking.

JEL-codes: C62 D23 D43 F12 L23 (search for similar items in EconPapers)
Date: 2026-10
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