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Market size and vertical integration: Stigler’s hypothesis reconsidered
Author(s) -
Elberfeld Walter
Publication year - 2002
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/1467-6451.00166
Subject(s) - vertical integration , argument (complex analysis) , economics , industrial organization , market size , returns to scale , production (economics) , economies of scale , barriers to entry , market structure , microeconomics , commerce , biochemistry , chemistry
According to Stigler [1951], vertical disintegration should be the typical development in growing industries, vertical integration in declining industries. The basic argument is that firms will spin off production stages subject to increasing returns to scale in response to market growth. This paper re‐examines Stigler’s hypothesis within an equilibrium model of industrial structure in which the organization of firms is endogenous. Stigler’s hypothesis is confirmed when entry into markets is free and firms compete. However, when entry into the intermediate good market is restricted, or intermediate good producers collude, vertical integration increases with market size.