October 9, 2009
Social Networks and Vertical Integration in the Laundry Business
In the category of "deals"-like things to read, here's a new paper on social networks and vertical integration in the laundry business - Airing Your Dirty Laundry. I love these kinds of papers mostly because they use a framework that's familiar to anyone who's taken a "Deals" class in analyzing the structure of an industry and why participants in that sector organize themselves the way they do.
Abstract: This article explores the relationship between an ethnic-based social network and vertical integration decisions in the laundry services industry. We find that stores in the social network are significantly less likely to vertically integrate than nonmember stores. This has three primary implications. First, the social network may be lowering the costs of using the market more than facilitating in-house production. This implies better outsourcing opportunities in a social network and may explain a documented relationship between social networks and firm economic performance. Second, institutional details of our example and the estimated relationship suggest a role for opportunism and reputation as determinants of the boundaries of the firm in a setting without asset specificity. Finally, although we provide evidence that better access to credit can increase the likelihood of vertical integration, we show that better outsourcing opportunities have a dominant effect of the social network in this particular setting.
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