Arguments for vertical integration

• Incentives: The company avoids direct costs of using the market such costly negotiations, cf. previous slide • Controls: The management is easier by internal control over intra-firm operations as opposed to inter-firm activities. Conflicts are cheaper to solve internally than across suppliers or customers. • “Structural advantages“: firm has some comparative advantages relative to the market. Williamson focuses here on the quality of 'communication' experience 'code of conduct' - this is easier to achieve in an integrated company. • Uncertainty: - VI can eliminate uncertainty from both upstream or downstream operation - Lower uncertainty = lower cost (it is better to know for sure what will happen) • Vertical integration may be preferable due to: - Uncertainty regarding inputs quality (upstream) - Uncertainty regarding the aggregate conditions like business cycle: with VI it is easier to ensure a smooth supply of inputs - Uncertainty regarding customers' efficiency, such as sales efforts (downstream) • Conversely, companies that have expertise in risk management might prefer to purchase inputs on the market (for them TC lower on market, so less likely to do VI) • Possibly combining own production input with purchase of corresponding input (this is also pressure the market for input)