Product Variety and Vertical Integration

Strategic Management Journal, Forthcoming

Ross School of Business Paper No. 1315

41 Pages Posted: 4 May 2016 Last revised: 21 Jul 2016

See all articles by Yue Maggie Zhou

Yue Maggie Zhou

University of Michigan, Stephen M. Ross School of Business

Xiang Wan

Ohio State University (OSU) - Department of Marketing and Logistics

Date Written: July 2016

Abstract

In vertical relationships the potential for scale economy in manufacturing often calls for specialization and outsourcing. Specialization, however, depends critically on the stability of the task and contractual environment. In a highly uncertain environment the need for frequent mutual adjustments favors integration instead of outsourcing. To evaluate vertical relationships in value chains where one stage competes on product variety under great uncertainty and the other stage competes on scale, we compare operations data at about 300 distribution centers within a major soft-drink bottler before and after it was integrated into an upstream firm. We find that vertical integration improved coordination for the integrated firm by aligning incentives and reducing strategic information asymmetry, but it worsened coordination for upstream rivals who shared the same downstream facilities.

Keywords: vertical integration; coordination; product variety; information asymmetry; stockout

Suggested Citation

Zhou, Yue Maggie and Wan, Xiang, Product Variety and Vertical Integration (July 2016). Strategic Management Journal, Forthcoming, Ross School of Business Paper No. 1315, Available at SSRN: https://ssrn.com/abstract=2768963

Yue Maggie Zhou (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States

Xiang Wan

Ohio State University (OSU) - Department of Marketing and Logistics ( email )

Fisher Hall 524
2100 Neil Ave
Columbus, OH 43210
United States

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