The project develops a theory of vertical integration in multilateral settings. This is an important contribution because nearly all of the recent work on transaction cost/incomplete contracting motivations for vertical integration makes the unrealistic assumption of bilateral trading relations in which a single seller produces an input for use by a single buyer. In most settings, economies of scale and/or scope dictate that supply or purchasing relations by multilateral. This project also seeks to shed light on the mechanism by which firms in highly concentrated industries maintain supracompetitive prices and, in particular, on the relevance of dynamic models of repeated interaction for understanding the determination of prices in these markets. It does this by analyzing a particular natural experiment involving the lead-based antiknock additive industry. There is a vast literature concerning the determination of the size and scope of a firm's activities. Particular attention has focused on theories of integration based on transactions costs in which the motivations for integration are tied to the problems arising from an inability to write comprehensive contracts. There appears to be an emerging theoretical and empirical consensus that such theories offer the most promising path for understanding and predicting a firm's integration decisions. This is why it is so important to improve the realism of the theories of vertical integration. An intermediate goods manufacturer will supply inputs to a number of firms and/or industries and a wholesaler or retailer will often handle numerous products, but existing theories assume a single supplier produces an input for use by a single buyer. This project corrects this flaw. The empirical research is also important. The determination of prices in oligopolistic industries where firms recognize their mutual interdependence is one of the central issues in industrial organization. A great deal of theoretical attention in recent years has focused on developing dynamic models in which firms sustain supracompetitive prices because of the concern that deviant behavior will result in the loss of collusive profits in the future. This project studies domestic lead-based antiknock additive industry because the prospect of future profits virtually disappeared on October 1979 due to the implementation of Environmental Protection Agency regulations. In the dynamic models of oligopolistic pricing, this sort of fall in demand would be expected to create downward pressure on prices prior to the actual fall in demand.
