Vertical Integration and Related Variations on a Transaction-Cost Economics Theme

That vertical integration is to be understood in large measure as a transaction-cost economising outcome has been generally conceded since Ronald Coase advanced the argument in 1937.2 The argument was forcefully restated by Kenneth Arrow as part of his assessment of the market failure literature (1969, p. 48). It was not, however, until 1971 that the underlying mechanics were described (Williamson, 1971). The argument has since been elaborated (Williamson, 1975, 1979; Klein, et al., 1978). Of equal if not greater importance, the same underlying transaction cost reasoning applies broadly — which is to say that vertical integration is a paradigm problem. Such apparently unrelated phenomena as the employment relation, aspects of regulation, vertical market restrictions, and even family organisation3 are variations on a theme.