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Integration versus Outsourcing in Stable Industry Equilibrium with Communication Networks

Discussion Papers

No.054

by OKAMOTO Yusuke
March 2006

ABSTRACT

For the selection of a firm's structure between vertical integration and arm's-length outsourcing, the importance of the thickness of the market had been emphasized in the previous literature. Here we take account of communication networks such as telephone, telex, fax, and the Internet. By doing so, we could illustrate the relationship between communication networks and the make-or-buy decision. With communication network technology differing in each type of firm, both vertically integrated firms and arm's-length outsourcing firms coexist, which was never indicated in the previous literature. However, when common network technology is introduced, such coexistence generically does not occur.

Keywords: buyer-supplier relationship, communication networks, international outsourcing, vertical integration
JEL classification: D23, D43, F23

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