In Coase's Footsteps

Abstract

This paper revisits two examples of vertical integration in the early automobile industry: GM and Fisher Body on the one hand and Ford Motor and Keim Mills on the other. The paper shows that asset-specific investment and the fear of hold-up played at best a negligible role. What mattered in the case of GM and Fisher Body was close coordination of assembly operations. In the case of Ford Motor and Keim Mills, vertical integration was an important step (but only one of many) that Henry Ford took to ensure that his production team remained intact. In the case of GM and Fisher Body, GM’s decision to coordinate the assembly of Chevrolet components, including car bodies, at multiple locations proved crucial. Shipping complete car bodies and storing them at each Chevrolet assembly plant was expensive and unwieldy. Instead, Fisher Body shipped sheets of stamped metal to assembly plants built at GM’s expense adjacent to each new Chevrolet assembly plant. At these plants, Fisher Body coordinated the welding of the sheets into car bodies with Chevrolet’s production team. The close coordination of these plant level operations made the activities of Fisher and Chevrolet indistinguishable from most activity that takes place inside a conventional firm. These production efficiencies made vertical integration sensible, but the date of formal legal integration came late and was not itself of great moment. The success of the Model T depended crucially on Henry Ford’s ability to keep his production team together. Many team members worked initially for Keim Mills, and Keim became a subsidiary of Ford. But, as in the case of GM and Fisher Body, the formal legal event marking vertical integration of Ford and Keim did not coincide with the important economic events. The members of the Keim Mills team designed the Model T well before vertical integration, and their later contributions came only when they moved from Buffalo to Detroit, something that was independent of and took place after vertical integration. The value of the Model T depended crucially on the members of the team Henry Ford put together, but relatively little on whether, as a legal matter, the Ford Motor Company employed them. Retracing famous journeys is a time-honored and worthy tradition. Great explorers necessarily leave some terrain unsurveyed when they visit new territory for the first time. As we mark the Law School’s centennial, there is one journey especially worthy of our attention. When he was a 20-year-old undergraduate, Ronald Coase spent the better part of a year visiting the great industrial plants in the United States. Out of this research emerged The Nature of the Firm, The Problem of Social Cost, and much of modern law and economics. Coase solved many mysteries that ∗ Harry A. Bigelow Distinguished Service Professor, University of Chicago. I thank Richard Brooks, R.H. Coase, Keith Gill, Mark Haywood, Michael Hilgers, and the staff at the Museum of Science and Industry for their help. The ideas in this paper grow out of my long, fruitful, and continuing collaboration with my colleague Robert Rasmussen, to whom I am, as always, most indebted. For its support of this and many other projects, I am grateful to the John M. Olin Foundation. 1 R. H. Coase, The Nature of the Firm, 4 Economica 386 (1937). 2 R. H. Coase, The Problem of Social Cost, 3 J L & Econ 1 (1960). year, but, happily for the rest of us, not all of them. One of the most intriguing arises out of the relationship between General Motors and Fisher Body, one of its principal suppliers. Coase was primarily interested in what drove managers to produce something inside a firm rather than acquire it in the marketplace. GM’s acquisition of Fisher Body was therefore a subject of particular interest to him. Fisher Body began as an independent firm that supplied GM with all of its closed car bodies. In 1926, GM acquired Fisher and thereafter produced all of its car bodies internally, along with the two other major components of their cars (the chassis and drive train), both of which it made largely in house. Hence, while interviewing GM executives in 1932, Coase naturally asked about the firm’s acquisition of Fisher Body. They told him that the need to build body plants next to GM’s assembly plants drove the decision. The conversation, however, seems to have stopped here. Coase did not learn why they wanted body plants next to assembly plants or why doing this required the vertical integration of the two firms. As it happened, other bits of evidence led him to a new understanding of the nature of the firm, and this line of inquiry