Transaction Cost Economics and Vertical Market Restrictions—Evidence

• DOI: 10.1177/0003603X1205700304
• Published date: 01 September 2012
• Author: Margaret E. Slade,Francine Lafontaine
• Date: 01 September 2012
• Subject Matter: Article

Transaction cost economics and

vertical market restrictions—Evidence

BYFRANCINE LAFONTAINE*

AND MARGARET E. SLADE**

We examine the empirical research on interfirm contracts that has

been inspired by Oliver Williamson’s work on transaction costs. We

eschew the vast and supportive empirical literature on the make-or-

buy decision, covered elsewhere, focusing instead on vertical market

restrictions. We organize our discussion around specific restrictions,

emphasizing the evidence concerning restrictions, such as contract

duration and adjustment clauses, that have been studied most

through transaction cost lenses, but also the findings from studies of

vertical restraints, namely those restrictions that have been the focus

of antitrust policy. We conclude with some general thoughts about

how what one can learn from these studies can inform antitrust

policy regarding vertical market restrictions.

THE ANTITRUST BULLETIN:Vol. 55, No. 3/Fall 2010 :587

* Professor of Business Economics and Public Policy, Ross School of

Business, University of Michigan.

** Professor Emeritus, Department of Economics, University of British

Columbia.

AUTHORS’ NOTE: This article was prepared for a special issue of the Antitrust Bul-

letin in honor of Oliver Williamson. Portions of this article draw on material in

our previous work, especially Exclusive Contracts and Vertical Restraints:

Empirical Evidence and Public Policy, in HANDBOOK OF ANTITRUST ECONOM-

ICS (Paolo Buccirossi ed., 2008) and Inter-Firm Contracts: Evidence, in HAND-

BOOK OF ORGANIZATIONAL ECONOMICS (Robert Gibbons & John Roberts eds.,

forthcoming).

© 2010 by Federal Legal Publications, Inc.

I. INTRODUCTION

Oliver Williamson’s important contributions to the theory of vertical

integration are well known and recognized. In our view, this recogni-

tion is due in part to the strong support that the empirical literature

on the make-or-buy decision has found for his argument that asset

specificity, resulting as it does in bilateral monopoly problems, is an

important determinant of the propensity of firms to internalize cer-

tain transactions, i.e., to vertically integrate, or to make rather than

buy.1

What has perhaps not been discussed or recognized to the same

extent is the important role that Oliver Williamson’s work on transac-

tion cost economics (TCE) has played in the study of contractual

clauses that restrict one or both parties to a transaction. We use

Williamson’s term “vertical market restrictions” to denote such

restrictive clauses, which include, but are not limited to, the vertical

restraints that have been the focus of antitrust policy. In part, we sus-

pect that his contributions regarding these restrictions have received

less attention because, in much of the empirical work on transaction

costs and vertical integration, the buy option that is opposed to verti-

cal integration is not fully specified. More often than not, purchases

and procurement do not take place in spot markets but instead are

governed by contracts. Nevertheless, in the empirical literature, trans-

actions that are organized via contracts are frequently not distin-

guished from spot-market interactions, and this leads to empirical

analyses and conclusions that do not consider the use or effect of spe-

cific contract clauses. There are exceptions to this regularity, however,

many of which are discussed below.

Not surprisingly, it is also the case that theories other than TCE

have been used to motivate empirical analyses of contracts and con-

tractual restrictions. The theory of property rights is a natural candi-

date. However, for quite some time, that theory was considered to be

a more mathematically grounded cousin of TCE. Thus empirical evi-

dence related to transaction cost arguments was often interpreted as

588 :THE ANTITRUST BULLETIN:Vol. 55, No. 3/Fall 2010

1See Paul Joskow, Vertical Integration, in this special issue of the

Antitrust Bulletin, and Francine Lafontaine & Margaret E. Slade, Vertical Inte-

gration and Firm Boundaries: The Evidence, 45 J. ECON. LITERATURE 629 (2007).