Power plays: Regulation, diversification, and backward integration in the electric utility industry

This paper explores how regulatory oversight influences strategic management. Predictions of the extent to which a firm diversifies and integrates upstream based on transaction‐cost economics are developed and then tested among 49 American electric utilities from 1974 through 1986, a period that witnessed increasingly hostile regulatory relations. The results confirm the influence of regulation on both diversification and backward integration, supporting the transaction‐cost view of these phenomena. The implications of these findings for the study of interorganizational relations, the concept of implicit contracting as a governance mechanism, and the pursuit of longitudinal theory‐building are discussed.