Explaining Intraindustry Differences in the Extent of Vertical Integration

The central purpose of this paper is to examine firms' vertical integration decisions as a consequence of strategic choices within an explicit market environment. I show that a unique equilibrium number of unintegrated downstream firms exists when the intermediate-good market is imperfectly competitive and nonintegration leads to savings in fixed costs. The outcome may be one in which some firms produce the intermediate good internally while others do not, despite the fact that all firms have identical ex ante opportunity sets. Thus, my results provide an explanation for intraindustry differences in the vertical organization of firms.