Vertical integration, appropriable rents, and the competitive contracting process

More than forty years have passed since Coase's fundamental insight that transaction, coordination, and contracting costs must be considered explicitly in explaining the extent of vertical integration. Starting from the truism that profit-maximizing firms will undertake those activities that they find cheaper to administer internally than to purchase in the market, Coase forced economists to begin looking for previously neglected constraints on the trading process that might efficiently lead to an intrafirm rather than an interfirm transaction. This paper attempts to add to this literature by exploring one particular cost of using the market system – the possibility of postcontractual opportunistic behavior.