Market size and vertical integration: Stigler's hypothesis reconsidered

Author: Elberfeld, Walter¹

Source: Journal of Industrial Economics, Volume 50, Number 1, March 2002 , pp. 23-42(20)

Publisher: Blackwell Publishing

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Abstract:

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.

Document Type: Original article

DOI: 10.1111/1467-6451.00166

Affiliations: 1: Staatwissenschaftliches Seminar, Universität zu Köln Albertus-Magnus-Platz, 50923 Köln, Germany Elberfeld@wiso.uni-koeln.de

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