The architecture of transaction networks
Subtitle: a comparative analysis of hierarchy in two sectors
By: Jianxi Luo, Daniel E. Whitney, Carliss Y. Baldwin, Christopher L. Magee
Contributors: Whitney, Daniel E.; Baldwin, Carliss Y. (Carliss Young); Magee, Christopher L.; Harvard Business School
Series: Working paper / Harvard Business School -- 11-076; Working paper (Harvard Business School) -- 11-076
Publisher: Harvard Business School
Published: 2011
Place of publication: Boston]
Language: eng
Number of pages: 39
Description: A hierarchy is a generic structure in which entities such as firms are ordered with respect to a specific relationship. Thus if A sells to B, which sells to C, then A, B and C form a hierarchy with respect to transactions. Prior industry studies often suggest a hierarchical form of organization in which firms are ordered, from "upstream" to "downstream", according to the sequence of production processes. However, little is known about whether transactional hierarchy varies across industry sectors, and, if so, what causes such variation. In this study, we use network-based methods of analysis to define and measure the degree of hierarchy in two industry sectors in Japan: automotive and electronics. Our empirical results show that the electronics sector exhibits a much lower degree of hierarchy than the automotive sector due to the existence of numerous interfirm transaction cycles. Transaction cycles in turn can only arise if a subset of firms have two-way "vertically permeable boundaries." Such firms (1) participate in multiple stages of the industry value chain (hence are vertically integrated); (2) purchase goods for downstream units from other firms in the sector; and (3) sell goods from upstream units to other firms in the sector. We conjecture that having two-way vertically permeable boundaries may allow firms designing innovative system products to advantageously access knowledge in their component divisions, while maintaining the competitiveness of those divisions by selling goods to external customers.
Notes: "January 2011, revised July 2011" -- Publisher's website.

Includes bibliographical references.