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4 J. L. Econ. & Org. 337 (1988)
Forward Integration into Distribution: An Empirical Test of Transaction Cost Analysis

handle is hein.journals/jleo4 and id is 345 raw text is: Forward Integration into Distribution:
An Empirical Test of Transaction Cost Analysis
University of Minnesota
University of Florida
The issue of forward vertical integration has attracted a good deal of attention
from researchers in several disciplines, including economics, marketing, and
law. Many explanations have been offered for this phenomenon, including
technological interrelationships involving economies of scale and scope
(Chandler), uncertainty and risk considerations (Arrow, 1969), information
externalities (Green), and strategic purposes. Blair and Kaserman (1983) offer
an extensive survey of the extant literature in this area.
Of particular note, however, is the recent rise in prominence of the trans-
action costs analysis (TCA) of vertical integration. This approach consists of a
blend of institutional economics, organizational theory, and contract law, and
has been developed primarily by Oliver Williamson (1979, 1985). He views
vertical integration as a response to the inability of arms-length market re-
lationships to govern exchange efficiently under particular circumstances.
The level of specialized assets' required to support the exchange, the
uncertainty2 surrounding the exchange, and the frequency3 of exchange are
The authors are in alphabetical order. The financial support provided to the first author by
the Graduate School Research Committee, University of Wisconsin is gratefully acknowledged.
The comments of the JLEO reviewer are greatly appreciated.
1. Specialized assets are those investments in physical and/or human assets that have very
limited salvage value outside the focal exchange.
2. Uncertainty refers to the condition of being unable to predict relevant contingencies.
3. Frequency refers to the distinction between one-shot exchange and recurrent exchange.
We shall not deal with this variable here since we are interested only in recurrent exchange.
Journal of Law, Economics, and Organization vol. 4, no. 2 Fall 1988
© 1988 by Yale University. All rights reserved. ISSN 8756-6222

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