Working Paper Series, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin), Royal Institute of Technology
Vertical integration in the real estate sector: Three case studies
Abstract: Companies and organizations choose different structures.
Some, like the Swedish Transport Administration, have chosen to be a "pure
client" and buys almost all things they need on the open market through
competitive procurement. Some, like the three private companies studied in
this paper, have chosen to vertically integrate to a considerable extent.
The main question is why they have done that and what advantages they see
from being vertically integrated. After a review of the theories of
vertical integration it is concluded that, in the studies cases, there is
no support for theories related to monopolization and only marginal support
for theories that focus on contracting problems related to the so called
hold up problem. In all three cases management skills and a stepwise
development of capabilities were relevant. The interpretation presented is
that the companies realized that they were good at certain things and then
saw opportunities to use and develop these skills in nearby markets.
Another important factor is that vertical integration gives information and
more options that are important in small number bargaining situations. The
companies bargaining power increases when they are better informed about
e.g. costs and profits in nearby activities, and when they can use in-house
units, if there are problems to find reasonable conditions on the outside
market. An important observation is that most of the units in these
companies also sell on the open market, and that it is common that they
both produce in house and buy similar goods and services on the market.
This also means that the company more easily can evaluate the
competitiveness of the internal units. If we look at the results from the
perspective of problems that a non-integrated actor, like the Swedish
Transport Administration, has to solve, it points to two special
challenges. The first is how to keep informed about the situation in the
"other" market. What are reasonable costs and what are happening on the
technological front? What tendered prices should be accepted and what
should be turned down? The second main challenge for a non-integrated
client is how to strengthen their bargaining position in small-number
bargaining situations, where there are risks for implicit collusion and
very high prices during boom periods on the market.
Keywords: Vertical integration; real estate; Sweden; (follow links to similar papers)
JEL-Codes: R10; R31; (follow links to similar papers)
30 pages, October 6, 2015
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