Vertical integration: a real options approach

Nicos Koussis and Florina Silaghi

Applied Economics Letters, 2023, vol. 30, issue 19, 2758-2764

Abstract: We develop a theoretical real options model and explore the trade-off between vertical integration and external procurement. In contrast to transaction cost theory, we show that higher volatility in the downstream market reduces the likelihood to switch to internal production. We also analyse the decision to acquire the supplier and provide novel predictions on the acquisition likelihood and premium contributing to studies relating to vertical M&As.

Date: 2023
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DOI: 10.1080/13504851.2022.2107159

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