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Technological change and the vertical organization of industries

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Abstract

The vertical scope of a firm, that is, which components or segments of the production processes are kept in–house and which are outsourced, is variously considered as depending on cost and/or technological conditions. Most of the literature focuses on the incentives for an individual firm facing exogenous competition and technological opportunities. In this paper we consider the problem from the perspective of the whole industry: in what respect does firm organizational behavior depend on the industry technological evolution and aggregate structure, and how does innovation and organizational behavior affect the industry structure. We build an evolutionary simulation model of an industry where competitors decide the number of internally produced components. We relate the industry average value of market outsourcing to the technological conditions prevalent in the industry. The results from the model shed light on a number of (apparently) contradictory suggestions in the economic and management literature.

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Notes

  1. We ignore agency costs, which amounts to assuming that agency costs affect all firms equally and the transaction costs refer to their net effect after agency costs.

  2. Note that we use product component, module and input interchangeably.

  3. An exhaustive discussion of the PNK properties can be found in Valente (2006). Ciarli et al. (2007a) describes a similar version applied to a market.

  4. Figures available from the authors.

  5. It would be interesting for future work to test where the first peaks (see Fig. 2) would occur in the case of highly integrated and highly modular goods.

  6. See Ciarli et al. (2007a) for an analysis of firms’ technological exploration of ‘complex’ technologies.

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Authors and Affiliations

  1. CIBI, Manchester Metropolitan University, MMUBS, Aytoun Street, Manchester, M1 3GH, UK

    Tommaso Ciarli

  2. University of L’Aquila, L’Aquila, Italy

    Tommaso Ciarli & Marco Valente

  3. University of Bologna, Bologna, Italy

    Riccardo Leoncini & Sandro Montresor

Authors
  1. Tommaso Ciarli
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  2. Riccardo Leoncini
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  3. Sandro Montresor
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  4. Marco Valente
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Corresponding author

Correspondence to Tommaso Ciarli.

Additional information

Previous versions of the paper, with differing titles, were presented at the Wehia 2006, 1st International Conference, Bologna; the International Schumpeter Society 11th ISS Conference, Sophia–Antipolis; and the SPRU 40th Anniversary Conference, at Brighton. We are grateful to conference participants for helpful comments and critiques, in particular Robin Cowan, Gerald Silverberg and Bo Carlsson. Comments from Luigi Marengo and two anonymous referees were very helpful in enabling us to improve the quality of the paper. Leoncini and Montresor acknowledge financial support from the PRIN project ‘Fragmentation and Local Development’, University of Bologna. The usual disclaimers apply.

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Ciarli, T., Leoncini, R., Montresor, S. et al. Technological change and the vertical organization of industries. J Evol Econ 18, 367–387 (2008). https://doi.org/10.1007/s00191-008-0092-x

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