Comments on: Vertical Integration and the Informational Content of Prices

By: David Gerard

David Gerard — Tue, 16 Mar 2010 15:09:43 +0000

Can you post the answer?

By: Peter Klein

Peter Klein — Mon, 08 Mar 2010 16:46:06 +0000

I’m putting this on my annual report under “Teaching Accomplishments”! ;-)

By: Dick Langlois

Dick Langlois — Mon, 08 Mar 2010 15:53:40 +0000

Thanks, Peter. You provided me with a new assignment for my organization course.

http://web.uconn.edu/langlois/ECON486/e486A4.html

By: Peter Klein

Peter Klein — Fri, 05 Mar 2010 14:54:40 +0000

Arend, yes, I agree with you completely. Markets and hierarchies are substitutes in the limited sense that one can organize a particular transaction in-house or on the open market (or via an intermediate form, etc.). But both organizational forms operate within a larger institutional context (private property, the price mechanism, and so on). Indeed, “designed orders” (i.e., firms) can only be economically efficient when they compete against other designed orders — otherwise we are back to the One Big Firm question posed in Coase 1937. I discuss this a little in my 1996 RAE article on economic calculation.

By: Arend

Arend — Fri, 05 Mar 2010 11:50:13 +0000

Interesting post!

“We view firms and the market not only as alternative ways of organizing economic activity, but also as institutions that shape each other.”

I understand the difference between hierarchies and orders; or taxis and comos; but I cannot get my mind around the claim that these are fundamentally different institutions, or even *alternative* ways of organizing economic activity. Orders are not organized and are the result of hierarchies which are organized; that is the whole (Menger-Hayekian) point. Resultants from orders, such as prices can represent information (subjective judgment) to hierarchies whether their integration is economically viable or not.

Comparing and contrasting these institutions, so to say, must lead to the conclusion that hierarchies and orders are instances of the same institution namely, exchange under the division of labor and private property: the free enterprise market economy. The only fundamental contrast exists between this kind of economic organization (including both hierarchy and order) and alternative kinds like interventionism or socialism. In this sense the loss of the price mechanism in the theory of the form is indeed lamentable since it effectively neglects one side of the coin.

By: Peter Klein

Peter Klein — Thu, 04 Mar 2010 05:08:10 +0000

Good question, Frederic. One could view cartels, price-fixing arrangements, etc. as “hybrids,” in the Williamsonian sense, and argue that relative price variability provides a rationale for hybrids as well as hierarchies.

By: Recomendaciones « intelib

Recomendaciones « intelib — Wed, 03 Mar 2010 17:21:07 +0000

[...] Vertical Integration and the Informational Content of Prices, by Peter Klein [...]

By: Frederic Sautet

Frederic Sautet — Wed, 03 Mar 2010 03:04:12 +0000

Peter,
Interesting post indeed. Thanks for this insight.
I was wondering if this could also find its parallel in anti-trust activity. In situations of inflation, by the same logic, one may see more attempts at “cooperation” in the market. This may give rise not only to vertical integration, but also perhaps to price fixing and cartel type behavior (forms of horizontal integration). This would explain the high level of anti-cartel activity in the 1960s-1980s for instance. Although it is still happening today in a relatively low inflationary environment. Just a thought.

By: David Hoopes

David Hoopes — Wed, 03 Mar 2010 03:01:58 +0000

I like teaching General Mills cases. One was a staple of the UCLA MBA program when I was a doctoral student there. General Mills owned Izod, Star Wars figurines, some electronic games, Eddie Baur, Red Lobster, and The Limited in the early 1980s. I’ve probably forgotten a few. I think in the 1960s they were even more “diversified.”

By: Peter Klein

Peter Klein — Tue, 02 Mar 2010 17:50:18 +0000

Thanks David, I missed that passage!