Thiele, Veikko (2007): The Demand for Tailored Goods and the Theory of the Firm.
Download (263Kb) | Preview
The transaction cost theory predicts that firms are inclined to vertically integrate transactions in response to the specificity of their required inputs. Yet, reality proves that some firms engage in repeated transactions with external suppliers aimed at procuring highly specific inputs. To explain this phenomenon, this paper elaborates on a firm's make-or-buy decision in a context with relational contracts in order to investigate how this decision is affected by the required input specificity. This paper demonstrates that a high degree of input specificity can lead to repeated market transactions being favored over vertical integration because demanding more specific inputs (i) impose lower costs to maintain repeated market transactions founded on relational contracts; and (ii), facilitate the self-enforcement of these relational contracts.
|Item Type:||MPRA Paper|
|Institution:||University of British Columbia|
|Original Title:||The Demand for Tailored Goods and the Theory of the Firm|
|Keywords:||Input specificity; vertical integration; market transactions; relational contracts; transaction cost theory|
|Subjects:||D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure
|Depositing User:||Veikko Thiele|
|Date Deposited:||01. Apr 2007|
|Last Modified:||14. Feb 2013 14:54|
Baker, G., R. Gibbons, and K. J. Murphy (2001). Bringing the market inside the firm? American Economic Review 91(2), 212–218.
Baker, G., R. Gibbons, and K. J. Murphy (2002). Relational contracts and the theory of the firm. Quarterly Journal of Economics 117(1), 39–84.
Binmore, K., A. Shaked, and J. Sutton (1989). An outside option experiment. Quarterly Journal of Economics 104(4), 753–770.
Bolton, P. and M. D. Whinston (1993). Incomplete contracts, vertical integration, and supply assurance. Review of Economic Studies 60(1), 121–148.
Bragelien, I. (2001). Asset ownership and implicit contracts. Working Paper Norwegian School of Economics and Business Administration.
Bull, C. (1987). The existence of self-enforcing implicit contracts. Quarterly Journal of Economics 102(1), 147–160.
Chiu, Y. S. (1998). Noncooperative bargaining, hostages, and optimal asset ownership. American Economic Review 88(4), 882–901.
Coase, R. H. (1937). The nature of the firm. Economica 4(16), 386–405.
Demsetz, H. (1988). The theory of the firm revisited. Journal of Law, Economics, & Organization 4(1), 141–161.
Foss, N. J., H. Lando, and S. Thomsen (1998). The theory of the firm. In B. Bouckaert and G. De Geest (Eds.), Encyclopedia of Law & Economics, pp. 631–658.
Garvey, G. T. (1995). Why reputation favors joint ventures over vertical and horizontal integration A simple model. Journal of Economic Behavior & Organization 28(3), 387–397.
Grossman, S. J. and O. D. Hart (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy 94(4), 691–719.
Halonen, M. (2002). Reputation and the allocation of ownership. The Economic Journal 112, 539–558.
Hart, O. and J. Moore (1990). Property rights and the nature of the firm. Journal of Political Economy 98(6), 1119–1158.
Holmström, B. and J. Roberts (1998). The boundaries of the firm revisited. Journal of Economic Perspectives 12(4), 73–94.
Itoh, H. and H. Morita (2005). Formal contracts, relational contracts, and the holdup problem. mimeo.
Joskow, P. L. (1988). Asset specificity and the structure of vertical relationships: Empirical evidence. Journal of Law, Economics, & Organization 4(1), 95–117.
Klein, B. (1988). Vertical integration as organizational ownership: The fisher body-general motors relationship revisited. Journal of Law, Economics, & Organization 4(1), 199–213.
Klein, B. (2000). Fisher-general motors and the nature of the firm. Journal of Law and Economics 43(1), 105–141.
Klein, B., R. G. Crawford, and A. A. Alchian (1978). Vertical integration, appropriable rents, and the competitive contracting process. Journal of Law and Economics 21(2), 297–326.
Klein, B. and K. B. Leffler (1981). The role of market forces in assuring contractual performance. Journal of Political Economy 89(4), 615–641.
Kvaloy, O. (2005). Asset specificity and vertical integration. Working Paper, Stavanger University College.
Levin, J. (2003). Relational incentive contracts. American Economic Review 93(3), 835–857.
MacLeod, W. B. and J. M. Malcomson (1989). Implicit contracts, incentive compatibility, and involuntary unemployment. Econometrica 57(2), 447–480.
Masten, S. E. (1984). The organization of production: Evidence from the aerospace industry. Journal of Law and Economics 27(2), 403–417.
Monteverde, K. and D. J. Teece (1982). Supplier switching costs and vertical integration in the automobile industry. Bell Journal of Economics 13(1), 206–213.
Pearce, D. G. and E. Stacchetti (1998). The interaction of implicit and explicit contracts in repeated agency. Games and Economic Behavior 23, 75–96.
Riordan, M. H. and O. E. Williamson (1985). Asset specificity and economic organization. International Journal of Industrial Organization 3(4), 365–378.
Ruzzier, C. A. (2007). Levels of asset specificity in relational contracting. Working Paper.
Shavell, S. (2007). Holdup, contracts, and legal intervention. Journal of Legal Studies, forthcoming.
Suzuki, Y. (2005). Integration vs. non integration, specific investments, and ex post resource distribution. International Economic Journal 19(1), 11–35.
Telser, L. G. (1980). A theory of self-enforcing agreements. Journal of Business 53(1), 27–44.
Thomas, J. and T. Worrall (1988). Self-enforcing wage contracts. Review of Economic Studies 55(4), 541–553.
Whinston, M. D. (2003). On the transaction cost determinants of vertical integration. Journal of Law Economics & Organization 19(1), 1–23.
Williamson, O. (1985). The Economic Institutions of Capitalism. New York: The Free Press.
Williamson, O. E. (1971). The vertical integration of production: Market failure considerations. American Economic Review 61(2), 112–123.
Williamson, O. E. (1979). Transaction-cost economics: The governance of contractual relations. Journal of Law and Economics 22(2), 233–261.
Available Versions of this Item
- The Demand for Tailored Goods and the Theory of the Firm. (deposited 01. Apr 2007) [Currently Displayed]