Supplier Switching Costs and Vertical
Integration in the Automobile
Industry
Kirk Monteverde & David Teece
Bell Journal of Economics (1982)
Vol. 13, Issue No. 1: pp. 206-213
Presented by Christina L. Frye
Research Questions
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How does specialized know-how impact
organizational design?
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What role does the development and deepening of
human skills play in determining when firms decide to
vertically integrate production processes ?
Theory & Hypothesis
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Theory
– Transactions cost theory of vertical integration
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When do we bring production in-house?
When are the switching costs high?
– Industrial “know-how”
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Firm-specific production processes / transaction-specific skills
Hypothesis: The greater is the applications engineering
effort associated with the development of any given automobile
component, the higher are the expected appropriable quasi
rents and, therefore, the greater is the likelihood of vertical
integration of production for that component.
Methods
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General Motors and Ford production (in U.S.) in 1976
133 automotive components (6 subsystems/categories)
Dichotomous DV: ≥80% of parts manufactured inhouse = vertically integrated
“Know-How” = amount of engineering effort required
to design part (rated by company officials)
Controls: (1) specific vs. generic components, (2) firm
identity, (3) “system” of parts (determined w/ replacement
parts wholesaler)
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Logistic regression probit modeling
Results
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Assessed 70%, 80% and 90% thresholds
– Vertically integrated = ≥80%
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Regardless of threshold, development effort associated
with design of components (i.e. “know how”/ transactionspecific skills) is related to vertical integration
Components specific to a single assembler are subject to
vertical integration
– Hypothesis is supported
– GM’s component production is more integrated than Ford’s
– Mild support for systems-effects (electrical system)
Conclusion
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There are transaction costs associated with
developing human skills
– Holds implications for vertical integration of firms
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Why? There are high switching costs if suppliers
acquire transaction specific “know how” at the
assembler’s expense.
– Cannot be easily transferred to other suppliers
– If switching costs are high, firms will vertically
integrate production processes
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Supports transactions costs theory