The document discusses the scope of firms and vertical integration. It explains that transaction cost theory can explain why firms exist and the boundaries of firms. Specifically, firms integrate vertically when transaction costs of using markets are high, such as when there are few firms, asset specificity, or opportunism. Vertical integration provides benefits like economies of scale but also costs such as reduced flexibility. Recent trends show a blurring of boundaries between firms and markets through various partnership models.

3. Transactions Costs and the Scope of the Firm P 1 P 2 P 3 C 1 C 2 C 3 Vertica l Product Geographical Scope Scope Scope V 1 V 2 V 3 P 3 P 2 P 1 C 3 C 2 C 1 V 1 V 2 V 3 [A] Single Integrated Firm [B] Several Specialized Firms linked by Markets In situation [A] the business units are integrated within a single firm. In situation [B] the business units are independent firms linked by markets. Are the administrative costs of the integrated firm less than the transaction costs of markets?

5. Aggregate Concentration in US Manufacturing, 1947-97

10. Iron ore mining Steel production Steel strip production Can making The value chain for steel cans MARKET CONTRACTS VERTICAL INTEGRATION MARKET CONTRACTS Canning of food, drink, oil, etc . VERTICAL INTEGRATION, AND MARKET CONTRACTS What factors explain why some stages are vertically integrated, while others are linked by market transactions?

13. Different Types of Vertical Relationship Spot sales/ purchases Long-term contracts Agency agreements Franchises Vertical integration Joint ventures Informal supplier/ customer relationships Supplier/ customer partnerships Low Degree of Commitment High Low Low Formalization High