Thiele, Veikko (2008): Firms' Procurement Decisions: Is Input Specificity Always an Argument for Vertical Integration?
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The transaction cost theory predicts that firms are inclined to vertically integrate transactions in response to the specificity of their required inputs. Yet, reality proves that some firms engage in repeated transactions with external suppliers aimed at procuring highly specific inputs. To explain this phenomenon, this paper investigates a firm's make-or-buy decision in a context with relational (i.e. non-enforceable) contracts, and exposes how this decision is affected by the required input specificity. This paper demonstrates that a high degree of input specificity can lead to repeated market transactions being favored over vertical integration because demanding more specific inputs is shown to (i) impose lower costs on firms to maintain repeated market transactions founded on relational contracts; and (ii), facilitate the self-enforcement of these relational contracts.
|Item Type:||MPRA Paper|
|Institution:||University of British Columbia|
|Original Title:||Firms' Procurement Decisions: Is Input Specificity Always an Argument for Vertical Integration?|
|Keywords:||Input specificity; vertical integration; market transactions; relational contracts; transaction cost theory|
|Subjects:||D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure
|Depositing User:||Veikko Thiele|
|Date Deposited:||22. Apr 2008 03:14|
|Last Modified:||25. Mar 2013 16:13|
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The Demand for Tailored Goods and the Theory of the Firm. (deposited 01. Apr 2007)
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