This paper provides an inductive theoretical framework that explains how and why
vertical disintegration happens, showing that transaction costs are an incidental
feature of industry evolution. I find that gains from intrafirm specialization set off a
process of intraorganizational partitioning, which simplifies coordination along parts
of the value chain. Likewise, latent gains from trade foster interfirm cospecialization,
which leads to information standardization. Given standardized information and
simplified coordination, new intermediate markets emerge, breaking up the value
chain, allowing new types of vertically specialized firms to participate in an industry,
and changing the industry’s competitive landscape.