If our Walrasian view of economic organization is correct, then business groups can be thought of as causative forces in economic systems that also cause them. Before testing this idea empirically, we needed first to develop a theory of business groups. To this end, in the last chapter, we constructed a highly stylized economic model consisting of upstream sectors producing intermediate inputs and downstream sectors using those inputs to produce final consumer goods. In the model, manufacturing firms decide whether to buy intermediate products at zero markups from a firm within a group, or at full markups from unaffiliated firms. Solving this model based on pricing decisions of firms in general equilibrium reveals multiple equilibria in the form of two distinct and economically stable solutions to business group integration in an organized economy: a high and a low concentration set of groups.

We can think of these two stylized economies as both consisting of interconnected networks of firms where authority and economic power interact in the context of a price structure. In one solution, the few very large business groups organize an economy in which they remain the stable elements, pushing other groups and independent firms into niches that the large groups do not dominate. In the other solution, many business groups coexist by occupying different distinct upstream or downstream niches and by trading with unaffiliated firms. The idealized model, therefore, predicts that business groups, which represent concentrated and authoritatively held assets, organize themselves quite differently across economies.