Integration Contracts and Asset Complementarity: Theory and Evidence from US Data

Firms sign an integration contract with the purpose of increasing their expected profits from trade and competition with third parties. Gains depend on how the contract improves the partners' production function (e.g. better synergies, organization, etc.), and how it increases their power in the marketplace. We investigate three bilateral integration contracts under different ownership allocations over resources: M&A, Minority Stake purchase and Joint Venture. We study them theoretically with a cooperative game approach. We derive some profitability conditions that we test empirically on a sample of about 9000 US firms. In order to estimate the link between ownership, asset complementarity and profits over time, we propose a novel multiproduct and time-varying complementarity index. Empirical results fully support our theoretical predictions.