Vertical Transactions under Uncertainty

Transactions between entities engaging in successive stages of production often take place outside the spot market. Some producers employ forward contracts to tie down price or quantity; others rely on some form of principal-agent arrangement; still others enter into joint stock ownership or even integrate vertically, thus, placing decision making in the hands of a single authority. These arrangements represent, in varying degrees, the producers’ attempts to bypass the market. In a market-oriented economy, such practices require careful explanation. The purpose of this paper is to study how market uncer­tainties motivate these arrangements and to explain why one of these arrangements or a combination of them is chosen under a given set of market conditions.