Managerial Firms, Vertical Integration, and Consumer Welfare∗

We show that important organizational decisions — such as whether to inte-grate — undertaken by managerial firms may adversely affect consumers, even in the absence of monopoly power in supply and product markets. While the effect is likely to come about when there is a negative shock of supply relative to demand, it is also possible for consumer-welfare-reducing reorganizations in the form of outsourcing to be triggered by entry of upstream suppliers. The results have implications for current policy debates about corporate governance and international outsourcing