Supplier Switching Costs and Vertical Integration in the Automobile Industry

This article tests a transactions cost theory of vertical integration with data from the U.S. automobile industry. Existing theory is first refined to take into account industrial know-how and the cost of transferring such know-how. A testable model is then developed, which is estimated by using probit techniques. The results support the view that transactions cost considerations surrounding the development and deepening of human skills have important ramifications for delineating efficient organizational boundaries.