Making sense of inefficient intrafirm transactions: A signalling approach

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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

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

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