On the Work of Nobel Prize Winner Oliver Williamson

In today's WSJ, David Henderson does a nice job explaining the work of Oliver Williamson:

Consider Mr. Williamson's work. Drawing on 1991 Nobel laureate Ronald Coase's work on why firms exist, Mr. Williamson showed that these voluntary institutions exist to 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, won't try to skin him by paying a price below the amount that would compensate him for the high fixed cost of the railroad. Solution: vertically integrate. Have the railroad owner also be the mine owner and you solve the problem.

Prior to Mr. Williamson's work, many legal scholars and economists had seen vertical integration as a way to acquire market power. This argument made little sense, as antitrust scholars Robert Bork and the late Ward Bowman pointed out, because it's hard to multiply market power using vertical integration. As the Nobel committee noted, Mr. Williamson's work led to less concern that vertical integration enhances market power and this has caused judges and antitrust officials to be less hostile to vertical integration.

Although the Nobel committee did not highlight Mr. Williamson's classic 1968 article, "Economies as an Antitrust Defense," I will. Mr. Williamson showed that horizontal mergers of companies in the same industry—even those that increase market power and even those where the increase in market power leads to a higher price—can create efficiency. The reason is that if mergers reduce costs, the reduction in costs can create more gains for the economy than the losses to consumers from the higher price.