The empirical determinants of vertical integration

Theoretical models of vertical integration are tested using a new measure based on the proportion of companies operating in customer and supplier industries that are vertically integrated. We confirm the roles of contractual and transaction-cost factors – small-numbers bargaining, lock-in effects, and the need for industries to share intangible assets. The role of (unobserved) persistent arm's-length contracts (alternative to vertical integration) is supported. Risk-aversion is not a significant motive.