Networks versus vertical integration

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2000-09-01

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Abstract

We construct a theory to compare vertically integrated firms to networks of manufacturers and suppliers. Vertically integrated firms make their own specialized inputs. In networks, manufacturers procure specialized inputs from suppliers that, in turn, sell to several manufacturers. The analysis shows that networks can yield greater social welfare when manufacturers experience large idiosyncratic demand shocks. Individual firms may also have the incentive to form networks, despite the lack of long-term contracts. The analysis is supported by existing evidence and provides predictions as to the shape of different industries.

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Kranton

Rachel Kranton

James B. Duke Distinguished Professor of Economics

Rachel Kranton studies how institutions and the social setting affect economic outcomes. She develops theories of networks and has introduced identity into economic thinking. Her research contributes to many fields including microeconomics, economic development, and industrial organization.

In Identity Economics, Rachel Kranton and collaborator George Akerlof, introduce a general framework to study social norms and identity in economics.

In the economics of networks, Rachel Kranton develops formal models of strategic interaction in different economic settings. Her work draws on empirical findings and integrates new mathematical tools to uncover how network structures influence economic outcomes.

Rachel Kranton has a long-standing interest in development economics and institutions. She focuses on the costs and benefits of networks and informal exchange, which is economic activity mediated by social relationships rather than markets.


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