Prior Literature: A Transactional Interpretation

The discussion here does not pretend to be a comprehensive review of the prior literature that deals with vertical integration. It aspires merely to show that the vertical integration of technologically separable production stages ultimately turns on transactional considerations. Although this is sometimes suggested, it is rarely explicit in the literature; indeed, claims to

Static Markets

Consider an industry that produces a multicomponent product, assume that some  of  these  components  are  specialized (industry specific),  and  assume further that among these are components for which the economies of scale m production are large in relation to the market. The market, then will support only a few efficient-sized producers for certain components. A

Sales Contracts for Component Supply

Assume that the product in question is technically complex and that it needs to be supplied on a semicontinuous basis.52 Assume also, unless deterred by reason ot contractual disabilities, that periodic redesign and/ or eolume changes are made in response to changing environmental con- lions. Three alternative supply arrangements can be considered: a once-

Unified Ownership of Plant and Equipment: Simple Hierarchy Extended

Considering the above limitations of autonomous contracting, a shift from market to hierarchy warrants examination. Rather, however, than move immediately to a complex hierarchy, might the unified ownership of plant and equipment between the successive stages suffice? Simple hierarchy would be maintained; only the ownership of physical capital would be changed. Two variants of

Complex Hierarchy: The Employment Relation Extended

A chronic problem with which economic organization must contend is how to harness opportunism. For the reasons given in Chapter 4, indi-vidual workers acquire monopoly powers, in some degree, over jobs. Also, as the above discussion of the inside contracting system reveals, the same holds true for managers of functional departments. While individual interests

Forward Integration into Wholesaling

The preceding discussion has been concerned mainly with the vertical integration of successive production stages. But the institutional failures framework applies more generally. Franchising, for example, can usefully be studied in these terms. Forward integration into wholesaling is another illustration. Consider Holton’s discussion of the wholesaling issue. Holton (1968, pp. 151-153) contends that the

Intermediate product markets and vertical integration: Concluding Remarks

Vertical integration is favored in circumstances where small-numbers bargaining would otherwise obtain — whether this prevails from the very outset or because, once the initial contract is let, the parties to the transaction are effectively “locked in” at the recontracting interval — and where, in the face of uncertainty and on account of bounded

Interfirm Exchange: Some Qualifications

As previously noted (Chapter 2, Section 3.3), business reputation is a valuable resource that is not to be squandered, and firms sometimes develop experience-rating systems in which they pool information with respect to their contractual dealings with common suppliers or customers (Leff, 1970). To describe interfirm exchange in strictly antagonistic terms is accordingly too

Vertical integration: Possible or Purported Antisocial Consequences

Anticompetitive effects of two types are commonly attributed to inte- gration. price discrimination and barriers to entry. The argument has been compactly expressed in the following terms: “. . . vertical integration loses its innocence if there is an appreciable degree of market control at even one stage of the production process. It becomes

Vertical integration: Antitrust Implications

Except for the rather special case where a regulated firm has integrated backward into equipment supply, which needs to be assessed in the context of the regulatory milieu, vertical integration poses antitrust issues of two kinds: price may be adversely affected and the condition entry may be impaired. It needs, however, to be appreciated

Internalizing the Incremental Transaction: Some Disabilities

The concern here is less with progressive distortions that occur as the firm grows in size than it is with the types of distortions that are prospectively associated with any transaction which a firm of medium to large size and complexity chooses to discharge. The social psychology and organization theory literatures are the sources

Size Considerations of the firm

Attention is shifted here from a discussion of the disabilities of vertical integration to consider the general size limits to which the firm is subject. The issue can be put as follows: Holding the degree of vertical integration and organization form constant, are there simple size impediments that radial expansion of the firm eventually

Incentive Limits of the Employment Relation

As indicated in Chapter 4, the employment relation permits long-run incentives of a promotion ladder sort to be effectuated that are unavailable in market contracting. The firm consequently enjoys an advantage over the market in this respect. Firms, however, have very real limitations when it comes to the award of large bonus payments for

Limits of vertical integration and firm size: Concluding Remarks

Internal organization ought to be regarded as a syndrome of charac- teristics: distinctive strengths and distinctive weaknesses, in a comparative institutional sense, appear nonseparably — albeit in variable proportions — as a package. Although the existence of market failure constitutes a pre- sumptive basis for internalizing transactions, the “defects” associated with market exchange may

The Unitary Form Enterprise

1. Structural Attributes As Chandler indicates (1966, Chap. 1), the late 1800’s witnessed the emergence of the large, single-product, multifunctioned enterprise — in steel, meatpacking, tobacco, oil, and so forth. These firms were organized along functional lines and will be referred to as unitary form (or U-form) enterprises. The principal operating units in the

Organizational Innovation: The Multidivisional Structure

1. General Faced with the types of internal operating problems that emerge as the U- form enterprise increases in size and complexity, the DuPont Company, under the leadership of Pierre S. duPont, and General Motors, under Alfred P. Sloan, Jr., devised what Chandler refers to as the multidivisional (or M-form) structure in the early

The multidivisional structure: Competition in the Capital Market

1. Frictionless Capital Markets  As the remarks of Bork and Bowman cited in Section 2.2 of Chapter 6 make clear, advocates of received microtheory are loath to concede that capital markets may fail to operate frictionlessly. Partly for this reason, the fiction that managers operate firms in fully profit maximizing ways is main- tained.

The multidivisional structure: Optimum Divisionalization

The M-form structure is thoroughly corrupted when the general management involves itself in the operating affairs of the divisions in an extensive and continuing way. The separation between strategic and operating issues is sacrificed in the process; the indicated internalization of capital market functions with net beneficial effects can scarcely be claimed. Accountability is

The “M-form hypothesis” and Concluding Remarks

Although the M-form structure was initially devised and imitated as a means by which to correct local conditions of inefficiency and subgoal pursuit, it has subsequently had pervasive systems consequences. These systems effects are partly attributable to competition in the product market; unadapted firms have found it necessary, as a survival measure, to eliminate

The multidivisional structure: A Classification Scheme

As noted, a major problem is posed for testing the M-form hypothesis in that, if all divisionalized firms are classified as M-form firms, without regard for the related internal decision-making and control apparatus, an overassignment to the M-form category will result. Some divisionalized firms are essentially holding companies, in that they lack the requisite