The Organization of Supply: a Vertical Equilibrium Analysis

Nadav Levy

No 142, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: In this paper I study how the make-or-buy decision of a firm depends on the organization of its peers. I consider a multi-firm framework in which firms choose whether to integrate into the supply of an intermediate input or to outsource its production, and choose the size of their supplier network if outsourcing. Firms find it optimal to share the same set of suppliers, as there are economies of scope in investment to suppliers taking multiple designs. These economies are due to spillovers of technical or operational know-how between projects and to savings in the setup costs on physical capital. The model admits multiple vertical equilibria that are Pareto-ranked, the one with the highest level of outsourcing being most efficient. Outsourcing is more likely in larger markets and when the economies of scope are stronger. The size of the optimal supplier network however typically decreases when the spillovers are stronger. These findings provide an insight to the patterns of reorganization of vertical supply relations observed over the last two decades

Keywords: utsourcing; Vertical Integration; Spillovers; Supply relations (search for similar items in EconPapers)
JEL-codes: D23 L22 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: The Organization of Supply: a Vertical Equilibrium Analysis (2004)
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