CFDP 1232

Vertical Integration, Networks, and Markets


Publication Date: July 1999

Pages: 38


The organization of supply relations varies across industries. This paper builds a theoretical framework to compare three alternative supply structures: vertical integration, networks, and markets. The analysis considers the relationship between uncertainty in demand for specific inputs, investment costs, and industrial structure. It shows that network structures are more likely when productive assets are expensive and firms experience large idiosyncratic shocks in demand. The analysis is supported by existing evidence and provides empirical predictions as to the shape of different industries.


bipartite graphs, outside options, link externalities


Published in Review of Economic Design (September 2000), 5(3): 301-331