Determinants of vertical integration in ready-mixed concrete industry

Abstract

In ready-mixed concrete (remicon) industry characterized by both substantial transportation costs and perishability of remicon, it is crucial for remicon firms to maintain a stable supply of cement when they face demand uncertainty. This paper investigates the impact of remicon demand uncertainty on vertical integration between remicon firms and cement firms. Empirical results show that the share of vertically integrated remicon plants is higher in geographic local markets faced with a high demand uncertainty. The result suggests that vertical integration between remicon and cement firms are resulted from reducing transaction costs due to demand uncertainty.