"Power Move: How Law and Public Policy Reshaped the Late-Twentieth-Century U. S. Firms"

Today, we live in a world in which a large number of powerful firms rely on contracting rather than vertical integration to coordinate their global operations. No longer do they find it necessary, or even desirable, to integrate vertically, as Chandlerian business theory would predict. This innovation was not foreordained by either of technological imperatives or trade liberalization policies, though both played important roles in the story. Central to this story—the reordering of center firms—were changes in U. S. law and public policy. In particular, court rulings in the late 1970s empowered a small yet influential number of firms to enter into new kinds of interfirm agreements, which enabled them to expand their control over supply chains without internalizing these tasks within the firm.
U. S. courts legalized territorial, non-price vertical restraints in 1977 in Sylvania v. Continental TV; and, by the late 1990s, price restraints were being legalized as well in State Oil v. Khan. Taken together, these legal innovations lowered the costs, and the risks, of franchising and contracting-out, and both reduced the desirability of vertical integration as a corporate strategy.
While these changes lowered transaction costs for the contracting firm, sometimes these arrangements imposed new challenges for suppliers and distributors. If the contracting-out firm has market power, it may use these types of supply-chain contracts to force lower input prices or terms of service. In the downstream market, a platform-retailer, for example, can use its market power to control distribution service providers’ laborers. Such vertical contracts can also be used as a device to coordinate producer pricing through the supply chain, raising consumer prices.
By contracting out many tasks that that had formerly internalized, firms have disempowered organized labor and disadvantaged both suppliers and distributors. In so doing, they have raised questions among legal scholars not only about the liberalization of vertical contracting, but also about the market power of dominant firms.