Research Summary
Research Summary
Vertical Relationships Between Firms
Description
Where should a firm draw its boundaries in the vertical chain of production? This has proved to be one of the most interesting and contentious debates among economists and strategists alike. On one hand, vertical integration into upstream and downstream businesses may facilitate coordination, align incentives, and facilitate investment in specific assets. On the other hand, vertical separation preserves the discipline and incentives of the market, and permits the firm to focus its managerial and other resources on its core business. Corts research in this field goes beyond these typical considerations to explore the strategic effects of vertical integration, i.e., the ways in which it affects competition between the firm and its rivals. Can a firm commit to more aggressive behavior by limiting its vertical scope in order to deter entry or induce accommodating responses from rivals? When are such commitments credible? What kinds of contracts should govern these relationships? Can firms soften competition through such delegation, or through delegation to common agents? Theoretical papers investigate these issues in general and with specific attention to firms innovation decisions; an empirical paper on the motion picture industry brings evidence to bear on the latter questions.