Why do firms make and buy? Efficiency, appropriability and competition in the trucking industry

Daifeng He · Jack A. Nickerson

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Outsourcing and Supply Chain Management Merger and Competition Analysis Law, Economics, and Judicial Systems

Abstract

Most literature examining firms’ make and buy decisions fails to explore when firms use both governance structures for similar transactions. We examine this phenomenon in the trucking industry, where it is common for a carrier to use both employee drivers and outsourcing at the same time. We argue that efficiency, appropriability and competition concerns lead carriers to organize on a haul-by-haul basis.We empirically examine our theory using a unique data from a small trucking firm in St Louis, MO, and find broad support for our hypotheses.We also discuss the possibility of alternative explanations of market power, capacity constraint, agency theory and property right theory for the use of make and buy. We conclude that these theories do not explain this phenomenon in the trucking industry. Thus, we conclude that it is the interaction of efficiency, appropriability and competition concerns that drive the decision to make and buy in the trucking industry.We further postulate that these concerns can manifest themselves in other industries, suggesting that our theory has applicability beyond trucking.

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