Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance

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

JEL-codes: R10; R31

30 pages, October 6, 2015

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