Incomplete Contracts and Industrial Organization

Gene Grossman and Elhanan Helpman

No 2280, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a unique, specialized component. Vertically integrated firms can manufacture the components they need in the quantity and type that maximizes profits, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but input suppliers face a potential hold-up problem. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the market and other parameters affect the equilibrium choices, and how the equilibrium compares with the efficient allocation.

Keywords: Hold-Up Problem; Input Specificity; Vertical Integration (search for similar items in EconPapers)
JEL-codes: D23 D43 D51 (search for similar items in EconPapers)
Date: 1999-11
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Incomplete Contracts and Industrial Organization (1999)
Working Paper: Incomplete Contracts and Industrial Organization (1999)
Working Paper: Incomplete Contracts and Industrial Organization (1999)
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