Editing Vertical integration (section)

==Economic theory==
An economic theory is a framework that defines how a particular economic system functions. Economists develop principles in which an economy adheres to, which provides insight onto the relationships between economic events, markets, companies, and the government.'''<ref>{{Cite web |last=Gandhi |first=Yashoda |title=11 Types of Economic Theory {{!}} Analytics Steps |url=https://www.analyticssteps.com/blogs/types-economic-theory |access-date=2023-03-28 |website=www.analyticssteps.com |language=en}}</ref>''' In economic theory, vertical integration has been studied in the literature on [[incomplete contracts]] that was developed by [[Oliver Hart (economist)|Oliver Hart]] and his coauthors.<ref>{{Cite journal|last1=Grossman|first1=Sanford J.|last2=Hart|first2=Oliver D.|date=1986|title=The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration|journal=Journal of Political Economy|language=en|volume=94|issue=4|pages=691–719|doi=10.1086/261404|s2cid=215807368 |issn=0022-3808|url=http://nrs.harvard.edu/urn-3:HUL.InstRepos:3450060|hdl=1721.1/63378|hdl-access=free}}</ref><ref>{{Cite journal|last1=Hart|first1=Oliver|last2=Moore|first2=John|date=1990|title=Property Rights and the Nature of the Firm|journal=Journal of Political Economy|language=en|volume=98|issue=6|pages=1119–1158|doi=10.1086/261729|s2cid=15892859|issn=0022-3808|url=http://nrs.harvard.edu/urn-3:HUL.InstRepos:3448675|hdl=1721.1/64099|hdl-access=free}}</ref> Consider a seller of an intermediate product that is used by a buyer to produce a final product. The intermediate product can only be produced with the help of specific physical assets (e.g., machines, buildings). Should the buyer own the assets (vertical integration) or should the seller own the assets (non-integration)? Suppose that today the parties have to make relationship-specific investments. Since today complete contracts cannot be written, the two parties will negotiate tomorrow about how to divide the returns of the investments. Since the owner is in a better bargaining position, he will have stronger incentives to invest. Hence, whether vertical integration is desirable or not depends on whose investments are more important. Hart's theory has been extended by several authors. For instance, DeMeza and Lockwood (1998) have studied different bargaining games,<ref>{{Cite journal|last1=de Meza|first1=D.|last2=Lockwood|first2=B.|date=1998|title=Does Asset Ownership Always Motivate Managers? Outside Options and the Property Rights Theory of the Firm|journal=The Quarterly Journal of Economics|language=en|volume=113|issue=2|pages=361–386|doi=10.1162/003355398555621|issn=0033-5533}}</ref> while Schmitz (2006) has introduced asymmetric information into the incomplete contracting setup.<ref>{{Cite journal|last=Schmitz|first=Patrick W.|date=2006|title=Information Gathering, Transaction Costs, and the Property Rights Approach|url=https://ideas.repec.org/a/aea/aecrev/v96y2006i1p422-434.html|journal=American Economic Review|language=en|volume=96|issue=1|pages=422–434|doi=10.1257/000282806776157722|s2cid=154717219|url-access=subscription}}</ref> In these extended models, vertical integration can sometimes be optimal even if only the seller has to make an investment decision.