The WSJ on Vertical Integration

4 December 2009 at 2:55 pm Peter G. Klein 3 comments

| Peter Klein |

It’s not as bad as this 2006 piece from Slate, but Monday’s WSJ front-pager, “Companies More Prone to Go ‘Vertical,'” is underwhelming at best. It shares a few interesting anecdotes about recent vertical mergers, but falls flat on two major grounds. First, like the Slate piece, it assumes that the advances in IT over the last few decades led to some sort of tectonic shift away from vertical integration, against which firms are now reacting by “rediscovering” the benefits of vertical coordination. Actually there’s little evidence for such a shift. Second, and more important, the article doesn’t bother to mention any theories about what vertical integration is and does. There are vague references to commodity-price volatility and the need to “control” the supply chain, but no recognition that risk-management and control over inputs can be achieved through contract as well as integration. Given that one of this year’s Nobel Laureates won the prize for his work on precisely this problem, you’d think some reference to transaction costs might be appropriate. Old Media, R.I.P.

Entry filed under: - Klein -, Business/Economic History, Myths and Realities, Theory of the Firm.

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3 Comments Add your own

1. Per Bylund | 4 December 2009 at 10:14 pm

There might not be empirical evidence of a technology-induced shift, but that might very well be a result of what you see and what you don’t rather than a real non-existence. It is perhaps too soon to tell.

What we do know is that technological development should theoretically have an effect on vertical integration as well as on other governance and organizational choices. Coase (1937) says so, even though he explicitly exemplifies with the telephone and telegraph (and not e.g. Babbagean analytical engines), and Durkheim (1933) most definitely discusses developments in communication through technological change as a driver of density and therefore facilitator of increased division of labor.
2. Donald A. Coffin | 7 December 2009 at 3:03 pm

I thought it’d be interesting to google “technological change and vertical integration,” to see what I’d get. Took about 30 seconds, and here’s a sampling…makes you wonder whether WSJ reporters have heard of google.

Vertical Integration and Distance to Frontier
Acemoglu, Daron; Aghion, Philippe ;Zilibotti, Fabrizio
http://ideas.repec.org/p/cpr/ceprdp/3565.html

Production Technology, Information Technology, and Vertical Integration under Asymmetric Information
Gamal Atallah
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=307085

Vertical integration in the computer mainframe industry: A transaction cost interpretation
Guido A. Krickx
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V8F-3YF4GMP-R&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1126094711&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=1d675c5bb0580c0dbeb45c689a7609ee

Vertical integration and technology: Theory and Evidence
Acemoglu, Daron; Aghion, Philippe; Griffith, Rachael; Zilibotti, Fabrizio

Click to access Vertical_Integration_and_Technology.pdf

Technological change and the vertical organization of industries
Ciarli, Tommaso; Leoncinii, Ricardo; Montresor, Sandro; Valente, marco
http://www.springerlink.com/content/mk56044l37k30531/

Maybe you could send those references back to the WSJ reporters…
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