Transactions, transaction costs, and vertical integration: A re-examination

The economic analysis of the transaction has its roots in the work of John R. Commons, and has recently been brought to the fore in the work of the ‘new institutionalists’, and especially in the work of Oliver E. Williamson. This article, drawing in part on the analysis of Commons, raises some important questions about Williamson's analysis of the role of transaction costs, and in doing so, attempts to further improve the relation of the theory of the transaction to the modem economy. The implications of the differences in these two theories of the transaction are brought to the fore in an analysis of Williamson's theory of vertical integration. According to Williamson, vertical integration is the outcome of the firm's transaction-cost minimizing response to forces such as opportunism, bounded rationality, and information impactedness. As this paper demonstrates, however, when one considers the transaction theory of Commons, as well as other factors, the scope of Williamson's analysis is seen to be excessively narrow. The result is a more comprehensive base from which to analyse the transactional structure, and more specifically here, vertical integration. © Edward Arnold 1992

Duke Scholars

Author Steven G. Medema Economics