Uncertainty Reduction and the Threat of Supplier Retaliation: Two Views of the Backward Integration Decision

The article examines the decision to vertically integrate backwards from two perspec tives : the extent to which vertical integration relieves the uncertainty of supply for a firm facing a variable demand function; and the threat that existing suppliers will retaliate if such vertical integration is attempted. Data from the PIMS data base are used to show that while the uncertainty reduction theory is strongly supported, there is value in complementing the theory by also taking potential retaliation into account: the results provide evidence that buyers will be discouraged from backward vertical integration if both the likelihood and the severity of retaliation are high.