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Journal of Law, Economics, and Organization Advance Access published online on July 9, 2008
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewn012
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© The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Optimal Vertical Arrangements when Resale Is Possible

Mariano Selvaggi*

London School of Economics

* Managerial Economics & Strategy Group, Department of Management, London School of Economics, London WC2A 2AE, UK. Email: m.selvaggi{at}lse.ac.uk.

This paper pinpoints optimal vertical arrangements in settings characterized by incomplete contracting and resale of an intermediate input (a "widget"). In the Grossman-Hart-Moore property rights theory, we conclude that sometimes strictly complementary assets should be owned separately to permit the emergence of a secondary market. In a richer model where the parties choose specific and nonspecific investments, vertical separation may also dominate joint ownership. The article then examines the profitability of three integration forms when the proposed bargaining model substitutes random-order values (e.g., the Shapley value). The conclusions differ markedly from existing claims. (JEL C70, C78, D23, L42).


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