Francine Lafontaine and Margaret Slade's superb review paper on vertical integration, "Vertical Integration and Firm Boundaries: The Evidence," appears in the current issue of the Journal of Economic Literature (Non-gated version here). In this paper, Lafontaine and Slade consider a broad range of factors potentially affecting vertical integration such as risk, agent effort, firm size, monitoring costs, and repeated interaction as well as the usual transaction-cost variables (asset specificity and uncertainty). They also look closely, following Whinston (2003), at distinctions between the transaction-cost (Williamson) and property-rights (Grossman-Hart-Moore) approaches. Here's the abstract:
Since Ronald H. Coase's (1937) seminal paper, a rich set of theories has been developed that deal with firm boundaries in vertical or input–output structures. In the last twenty-five years, empirical evidence that can shed light on those theories also has been accumulating. We review the findings of empirical studies that have addressed two main interrelated questions: First, what types of transactions are best brought within the firm and, second, what are the consequences of vertical integration decisions for economic outcomes such as prices, quantities, investment, and profits. Throughout, we highlight areas of potential cross-fertilization and promising areas for future work.
Originally posted by Organizations and Markets blogger Peter Klein