Incomplete Contracts, Vertical Integration, and Supply Assurance.

This paper extends the analysis of transactions cost models of vertical integration to multilateral settings. Its main fo cus is on supply assurance concerns that arise when several downstream firms are competing for inputs in limited supply. Integration reduce s supply assurance concerns for an integrating firm but it may increas e them for others. Therefore, to explain the scope of any firm, one mu st consider the overall network of production and distribution relation s. Three fundamental questions are addressed: (1) What are the effects of different integration structures?; (2) What determines the socially efficient integration structures?; and (3) How do equilibrium integration structures differ from socially efficient structures? Copyright 1993 by The Review of Economic Studies Limited.