Supply chain integration as a form of vertical interaction in the theory of the firm

Abstract

The form of organization and performance of both the entire supply chain and the markets at its individual links are determined by the structure and mechanisms of vertical interaction of its participants. Most existing approaches to explaining such forms emphasize the differences between hierarchy, market and hybrid contracting. This study specifies the forms of vertical interaction in supply chains and determines the factors of their choice. Supply chain integration on a par with vertical restrictive agreements is proposed to be considered as a form of hybrid contracting. On the basis of the theory of the firm the question of the choice of the form of vertical interaction is considered. It is shown that supply chain integration leads to a fundamental transformation of market multilateral relations into bilateral supply contracts and to the formation of transactional-specific assets which ensure the sustainability of this form of vertical interaction. As a result, compared to market interactions, there is a decrease in transaction costs while control costs increase, so supply chain integration occupies an intermediate place between the market and vertical restrictive agreements.