Corporate Strategy Diversification - Prof. Dr. Bernd Venohr

Degree of vertical diversification (integration)
explained by transaction cost theory
� Developed by Ronald Coase ( Nobel Memorial Prize in
Economics in 1991 ; The Nature of the Firm)
� Why economy is populated by a number of business firms,
instead of consisting exclusively of a many independent, selfemployed
people who contract with one another ?
� Key driver: transaction costs of the market (= cost of
locating, negotiating, and enforcing a contract) . Firms will arise
when they can arrange to produce what they need internally
and avoid these costs.
� There is a natural limit to what can be produced internally :
"decreasing returns to the entrepreneurial function“ ( overhead
costs and mistakes in resource allocation)
Source: Coase, Ronald. "The Nature of the Firm".; Wikepedia
© 2006 Dr. Bernd Venohr
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