An alternative approach is taken by scholars in industrial organization, who
view vertical integration as a strategy to reduce costs, rather than to gain
monopoly power. Coase (1937) was one of the earliest writers to formally argue
that firms will undertake those activities that they consider cheaper to administer
internally than to buy in the external marketplace. Stigler (1951) argued
that the type of activity to be integrated would change according to the stage in
the life of the organization. Later, Williamson (1971) further elaborated the
argument, stating that there are times when hierarchies are more efficient than markets. Klein et al. (1978) suggested that even m competitive markets,
enormous contracting, transaction, coordination and/or litigation costs could
in some cases cause the firm to opt for vertical integration. In general, these
authors have taken the perspective that the vertical integration issue is
important primarily as a cost-reduction strategy. While this approach is
certainly valid, it too focusses primarily on the positive incentive and ignores
the disincentives associated with back integration - which include the threat of
supplier retaliation