A Transaction Cost Explanation of Vertical Control in International Markets

Abstract

The author applies a model based on transaction cost analysis to explain the vertical control selections made by a sample of exporters. The model, which obtains significant support, suggests that an important contingency when deciding on the desired level of vertical control in a particular instance, is the ability of the market to limit the opportunistic tendencies of outside intermediaries. In effect, the market's ability to enforce contractual arrangements is often limited. When such enforcement cannot be relied upon, greater control represents a necessary alternative.