Making sense of inefficient intrafirm transactions: A signalling approach

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We provide a signalling model of inefficient intrafirm transactions. If an integrated firm retains the option of buying intermediate goods in the open market, the decision to make or buy can be a signal about its cost of producing the intermediate good. In particular, the decision to supply internally can be a signal that its internal production cost is favorable compared with the market price. Consequently, a firm with a higher cost than the market price might have an incentive to mimic the firms with a lower cost; it forgoes the chance to buy from the market at a lower acquisition cost in order to induce output contraction by the rival firm in the final product market. This incentive for signalling will lead a firm which would otherwise buy from the market to supply internally, because of the strategic consequences in the downstream market.

Original languageEnglish
Pages (from-to)495-508
Number of pages14
JournalInternational Journal of Industrial Organization
Volume12
Issue number4
DOIs
Publication statusPublished - 1994 Dec

Fingerprint

Costs
Sensemaking
Incentives
Intermediate goods
Market price
Production cost
Signaling model
Contraction
Integrated
Product market
Make-or-buy

All Science Journal Classification (ASJC) codes

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

Cite this

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Making sense of inefficient intrafirm transactions : A signalling approach. / Choi, Jay Pil.

In: International Journal of Industrial Organization, Vol. 12, No. 4, 12.1994, p. 495-508.

Research output: Contribution to journalArticle

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