Virginia Postrel’s written a must-read Economic Scene column in today’s New York Times. Its topic is specialization, and specifically the move away from vertical integration in the structure of many industries. Technological change has contributed to making this move possible and profitable.
There’s a large field in new institutional economics that explores precisely this dynamic. It builds on the ideas in Coase’s seminal article “The Theory of the Firm,” in which Coase analyzes how transaction costs determine what transactions take place in markets and what transactions take place internally, in firms. The move away from vertical integration is an indication that transacting through markets has gotten easier. Firms still exist for several reasons, explored in related literature stemming from Oliver Williamson’s pioneering work, including ex post vs. ex ante monitoring costs, contracting costs, and access to capital markets.
In fact, my main summer research project is precisely in this vein. How did the reformulated gasoline requirements of the Clean Air Act amendments of 1990, and subsequent state-level boutique fuel regulations, affect refining transactions? Did they induce more vertical integration, or less? Did wholesale refiners merge with companies in other parts of the value chain? And what did these regulations do to refining costs?