A Conceptual Framework for Analyzing Economies of Vertical Integration
1969
Logan, Samuel H.
The objective of this paper is to develop a framework for quantitatively analyzing economic aspects of vertical integration by a firm. The model is based on a firm that possesses a multidimensional or lexicographic utility function in which some optimizing criteria are established for several variables. The two particular firm goals considered in this case are maximization of return on investment and reduction of short‐run risk. The effects of integration are considered first in terms of changes in costs under conditions of certainty and then in terms of changes in costs and/or uncertainty under imperfect market coordination. The latter situation occurs when the market mechanism is inadequate with respect to communicating the necessary or correct requirements of price and product specification.
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