The Co-Evolution of Vertical Outsourcing and

Horizontal Integration in International

Production

Ari Van Assche

University of Hawaii at Manoa

Abstract

In many globalized industries, vertical outsourcing seems to co-evolve with horizontal integration in the component sector. In order to account for this phenomenon, I build an industry-equilibrium model with monopolistic competition and perfect contracts that allows the organization of the firm to be endogenous in both the vertical and horizontal dimensions of production. The model illustrates that the co-evolution of vertical outsourcing and horizontal integration is most likely to occur in industries with low mismatch costs of adapting standardized intermediate goods and high increasing returns to scale in the intermediate good sector. This paper also provides a theoretical legitimation of Stigler’s contentious conjecture that firm production structures become vertically disintegrated as an industry expands.

JEL classification: F23, F12, L22

Keywords: vertical outsourcing, horizontal integration, de facto standardization