Market structure, market conditions, product characteristics, and the theory of the firm
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A number of explanations have been offered in the literature concerning the nature and formation of the firm as well as the contractual arrangements that arise among firms. This paper extends the theory of the firm by examining the intrafirm/interfirm transaction spectrum under conditions of imperfect competition. In particular, a model of successive monopoly is introduced in order to explain the phenomena of vertical integration, franchise, and contract--the range of the above mentioned spectrum. The analysis reveals that the optimizing strategy of a firm (selection of the optimal position within the transaction spectrum) is a function of market structure, market conditions and product characteristics. In addition, this study provides some answers to persistent questions related to production externalities, collusion, price fixing, contract enforcement and advertising.
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