Advanced Corporate Strategy

ST104x

Empirical evidence

Empirical studies that examine vertical integration can be classified into two broad categories:

• those that examine when vertical integration occurs and

• those that examine the performance consequences of vertical integration.

The empirical evidence on when vertical integration occurs leads to some very strong
conclusions. Firms tend to be vertically integrated when asset specificity and uncertainty are
high. Specifically, the evidence on asset specificity is very strong.

When asset are specificity, that is, they have low value elsewhere, vertical integration lowers
holdup risk and therefore it makes sense for a firm to be vertically integrate.

The empirical evidence on the performance consequences of vertical integration is relatively

weak. Overall, the evidence is still in accordance with the basic tenets of Transaction Cost
Economics.

When firms are vertically integrated for transactions that involve high asset specificity, they
tend to have a high performance. Similarly, when they use the market for transactions that
involve low asset specificity or for which high powered incentives are required, their
performance tends to be high.

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