Markets, Hierarchies, and Innovation
Industrial organization traditionally has been concerned with explaining why industries are organized in specific ways and with evaluating conduct and performance patterns emerging from given industrial structures.' It has largely ignored the relationship between the costs of effecting specific transactions and the institutional structures governing them, but a growing body of literature has begun to focus quite explicitly on this relationship. 0. E. Williamson's description of a number of specific factors that encourage firms to internalize transactions across different stages of a production process, rather than contract in markets, is a major contribution in this area.2 His essential argument is that, under certain conditions, hierarchical control is superior to contracting for governing transactions. This superiority derives primarily from the ability of jointly owned economic units to substitute adaptive sequential decision making for extensive contingent claims contracting. In addition, management decree is ordinarily a more effective and less costly means of conflict resolution than thirdparty arbitration or litigation. At some point, of course, rising costs of managerial control may outweigh any benefits of extending the scope of common ownership.3 Recent research has extended earlier contributions by stressing the