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Can vertical integration be explained entirely by transaction costs? Discuss the normative implicati The emergence of the "New Institutional Economics" led to a revival of the efficiency explanations of institutions. The theory of transaction costs, in particular, is said to provide a "scientific" explanation of the existence, size and hence degree of vertical integration (VI) of firms. Furthermore, as we shall see, this theory also seemed to imply that the level of VI is the optimal one with obvious implications for the appropriate government policy towards them. TC have been described by Arrow as the costs of running the economic system but besides that no clear definition has been provided. TC can be classified as "ex ante" which include search and information costs and the bargaining, deciding and drafting of a contract and as "ex post" which refer to the execution, policing and enforcement costs of this contract. TC have been said...

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