Prices Versus Quantities and Vertical Financial Integration

This article provides a testable theory to predict financial vertical integration for a small, but industrially important, class of vertical firm relations. The most important difference between this and earlier theories of vertical integration is that by combining two consistent theories, we predict both the types of coordination and product flow functions between two units and their financial relations. The financial integration theory is based on Williamson's theory (1975) of market failures, and the properties of transactions theory is based on Weitzman's theory (1975) of the differences between price and quantity controls in central planning.