Vertical integration, appropriable rents, and the competitive contracting process

Journal Article · Sun Oct 01 04:00:00 EDT 1978 · J. Law Econ.; (United States)

DOI:https://doi.org/10.1086/466922· OSTI ID:6411516

Klein, B ^[1]; Crawford, R G; Alchian, A A

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1. Univ. of California, Los Angeles

The potential of post-contractural apportunistic behavior for improving market efficiency through intrafirm rather than interfirm transactions is examined under the assumption that vertical costs will increase less than contracting costs as specialized assets and appropriable quasi rents increase. Vertical integration protects against the risk of contract cancellation and can create market power which is not generally referred to as monopoly. Contracts used as a alternative provide economically enforceable protection against opportunistic behavior. Solutions to opportunistic behavior problems can include joint ownership of common assets and condominium ownership of services. Economies of scale are major factors in some businesses, such as insurance. The complexities of ownership relations makes it difficult to assign higher costs to either the contract or vertical-integration approach. This suggests that economic analysis should be used to identify which is most advantageous for specific kinds of activities.

• OSTI ID: 6411516
• Journal Information: J. Law Econ.; (United States), Journal Name: J. Law Econ.; (United States) Vol. 21:2; ISSN JLLEA
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200* -- Energy Planning & Policy-- Economics & Sociology
BEHAVIOR
COMPARATIVE EVALUATIONS
COMPETITION
CONTRACTS
COST
ECONOMIC ANALYSIS
ECONOMICS
LEASING
MARKET
OWNERSHIP
RISK ASSESSMENT
VERTICAL INTEGRATION