"Coase's fundamental insight [was] that transaction, coordination, and contracting costs must be considered explicitly in explaining the extent of vertical integration...[We] explore one particular cost of using the market system-the possibility of postcontractual opportunistic behavior," (p.297)

"The particular circumstance we emphasize as likely to produce a serious threat of this type of reneging on contracts is the presence of appropriable specialized quasi rents. After a specific investment is made and such quasi rents are created, the possibility of opportunistic behavior is very real. Following Coase's framework, this problem can be solved in two possible ways: vertical integration or contracts," (p.298)

"The primary alternative to vertical integration as a solution to the general problem of opportunistic behavior is some form of economically enforceable long-term contract," (p. 302).

"Long-term contracts used as alternatives to vertical integration can be assumed to take two forms: (1) an explicitly stated contractual guarantee legally enforced by the government or some other outside institution, or (2) an implicit contractual guarantee enforced by the market mechanism of withdrawing future business if opportunistic behavior occurs...[However, they are] often very costly solutions. They entail costs of specifying possible contingencies and the policing and litigation costs of detecting violations and enforcing the contract in the courts," (p.303)

"If some retailers [provide extra] services [such as advertising, pre-sale demonstrations, etc] and ask for a corespondingly higher price whereas others do not provide the services and offer to sell the product to consumersat a lower price then an unstable situation emerges. Sales are diverted from the retailers who do provide the special services at the higher price to the retailers who do not provide the special services and offer to sell the product at the lower price....A customer,because of the special services provide by one retailer, is persuaded to buy the product. But he purchases the product from another paying the latter a lower price. In this way the retailers who do not provide the special services get a free ride at the expense of those who have convinced consumers to buy the product," (pp. 91-92).

"[The manufacturer can prevent] this by establishing a minimum retail price that guarantees a minimum gross markup. Therefore retailers are forced to compete by providing special services with the product and not by reducing the retail price," (pp. 91-92).

"Any profits are competed away in equilibrium by competitive expenditures on fixed (sunk) assets, such as initial specific investments (for example, a sign) with low or zero salvage value if the firm cheats, necessary to enter and obtain this preferred position of collecting the premium stream. These fixed (sunk) costs of supplying credibility of future performance are repaid or covered by future sales on which a premium is earned. In equilibrium,the premium stream is then merely a normal rate of return on the 'reputation,' or 'brand-name' capital created by the firm by these initial expenditures. This brand-name capital, the value of which is highly specific to contract fulfillment by the firm, is analytically equivalent to a forfeitable collateral bond put up by the firm which is anticipated to face an opportunity to take advantage of appropriable quasi rents in specialized assets," (p.306).

We can generally say that the larger the appropriable specialized quasi rents (and therefore the larger the potential short-run gain from opportunistic behavior) and the larger the premium payments necessary to prevent contractual reneging, the more costly this implicit contractual solution will be...the lower the appropriable specialized quasi rents, the more likely that transactors will rely on a contractual relationship rather than common ownership. And conversely, integration by common or joint ownership is more likely, the higher the appropriable specialized quasi rents of the assets involved," (pp.306-307).

"Klein et al. (1978) and Williamson (1979) added further content by arguing that a contractual relationship between a separately owned buyer and seller will be plagued by opportunistic and inefficient behavior in situations in which there are large amounts of surplus to be divided ex post and in which, because of the impossibility of writing a complete, contingent contract, the ex ante contract does not specify a clear division of this surplus. Such situations in turn are likely to arise when either the buyer or seller must make investments that have a smaller value in a use outside their own relationship than within the relationship (i.e., there exist 'asset specificities')," (p.692).

"While these statements help us understand when the costs of contracting between separately owned firms may be high, they do not elucidate what the benefits are of 'organizing the transaction within the firm.' In particular, given that it is difficult to write a complete contract between a buyer and seller and this creates room for opportunistic behavior, the transactions cost-based arguments for integration do not explain how the scope for such behavior changes when one of the self-interested owners becomes an equally self-interested employee of the other owner," (p.692).

"A second question raised by the transactions cost-based arguments concerns the definition of integration itself. In particular, what does it mean for one firm to be more integrated than another? For example, is a firm that calls its retail force 'employees' more integrated than one that calls its retail force 'independent but exclusive sales agents'?"

"Existing theories cannot answer these questions because they do not give a sufficiently clear definition of integration for its costs and benefits to be assessed...We define integration in terms of the ownership of assets and develop a model to explain when one firm will desire to acquire the assets of another firm," (p.693).