Supplier Switching Costs and Vertical Integration in the Automobile Industry

This paper tests a transactions cost theory of vertical integration using data from the U.S. automobile industry. Existing theory is first refined to take industrial know-how and its cost of transfer into account. A testable model is then developed which is estimated using probit techniques. The principal hypothesis is supported by the data, suggesting that transactions cost considerations surrounding the development and deepening of human skills have important ramifications for the delineation of efficient organizational boundaries.