David R. Henderson  

Bio of Oliver Williamson

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The turning point in Williamson's thinking about markets and firms happened when he was an economist in 1966-67 with the Antitrust Division of the U.S. Department of Justice. In his biography at the Nobel site, Williamson writes:

Although the leadership and staff of the Antitrust Division in the late 1960s were both superlative, the prevailing attitude toward nonstandard and unfamiliar contractual practices and organization structures was that such "abnormalities could be presumed to have anticompetitive purpose and effect." Indeed, given that the prevailing price theoretic orientation effectively disallowed economies of a non-technological kind, it could hardly have been otherwise. That economies could result from organizational and contractual design was simply outside the canon.

Williamson changed "the canon." Drawing on 1991 Nobel laureate Ronald Coase's work on why firms exist, Williamson showed that these voluntary institutions solve problems that arms-length market transactions have trouble solving. Take, for example, a coal mine that depends on a railroad line to ship its coal. Before the mine owner develops the mine, he wants to be assured that the railroad owner won't charge him a monopoly price. Before the potential railroad owner builds the spur, he wants to be sure that the coal mine owner, his only customer, will pay him a price that compensates for the high cost of building the railroad. Once the railroad is built, that cost is sunk. The solution in this case is to vertically integrate: that is, the railroad owner is also the mine owner. Thus, firms serve as a means of resolving conflicts.

This is from the bio of Nobel prize winner Oliver Williamson, recently posted on The Concise Encyclopedia of Economics.

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