Testing Organizational Economics Theories of Vertical Integration

This article classifies empirical research on vertical integration under four approaches - value-added-to-sales, qualitative-quantitative, input-output, and microanalytic. The emphasis here is on the microanalytic approach which has accumulated the most systematic evidence to support its theoretical propositions. In particular, this article emphasizes theoretical and empirical contributions from organizational economics (especially transaction costs and agency theories) for both vertical integration and (vertical) contracting. Limitations and methodological challenges concerning the empirical testing of theories of vertical integration are addressed and suggestions for further research are provided.