“[T]he ultimate unit of activity ... must contain in itself the three principles of conflict, mutuality, and order. This unit is a transaction,” (p.4).

“As the term suggests, transaction cost economics adopts a microanalytic approach to the study of economic organization. The focus is on transactions and the economizing efforts that attend the organization thereof...With a well-working interface, as with a well-working machine, these transfers occur smoothly. In mechanical systems we look for frictions: Do the gears mesh, are the parts lubricated, is there needless slippage or other loss of energy?” (p.1).

“The economic counterpart of friction is transaction cost: Do the parties to the exchange operate harmoniously, or are there frequent misunderstandings and conflicts that lead to delays, breakdowns, and other malfunctions? Transaction cost analysis supplants the usual preoccupation with technology and steady-state production (or distribution) expenses with an examination of the comparative costs of planning, adapting, and monitoring task completion under alternative governance structures.“ (pp.1-2).

“Rather than characterize the firm as a production function, transaction cost economics maintains that the firm is (for many purposes at least) more usefully regarded as a governance structure.” (p.13)

“Contrary to earlier conceptions–where the economic institutions of capitalism are explained by reference to class interests, technology, and/or monopoly power–the transactions cost approach maintains that these institutions have the main purpose and effect of economizing on transaction costs,” (p.1).

“Governance...is the means by which to infuse order, thereby to mitigate conflict and realize mutual gain...Furthermore, the transaction is made the basic unit of analysis,” (p.2).

“Coase's fundamental insight [was] that transaction, coordination, and contracting costs must be considered explicitly in explaining the extent of vertical integration...[We] explore one particular cost of using the market system-the possibility of postcontractual opportunistic behavior,” (p.297)

“The particular circumstance we emphasize as likely to produce a serious threat of this type of reneging on contracts is the presence of appropriable specialized quasi rents. After a specific investment is made and such quasi rents are created, the possibility of opportunistic behavior is very real. Following Coase's framework, this problem can be solved in two possible ways: vertical integration or contracts,” (p.298)

“An appropriable quasi rent is not a monopoly rent in the usual sense, that is, the increased value of an asset protected from market entry over the value it would have in an open market. [It] can occur with no market closure or restrictions placed on rival assets. Once install, an asset may be so expensive to remove or so specialized to a particular user that if the price paid to the owner was somehow reduced the asset's services to that user would not be reduced,” (p.299).

“The primary alternative to vertical integration as a solution to the general problem of opportunistic behavior is some form of economically enforceable long-term contract,” (p. 302).

“Long-term contracts used as alternatives to vertical integration can be assumed to take two forms: (1) an explicitly stated contractual guarantee legally enforced by the government or some other outside institution, or (2) an implicit contractual guarantee enforced by the market mechanism of withdrawing future business if opportunistic behavior occurs...[However, they are] often very costly solutions. They entail costs of specifying possible contingencies and the policing and litigation costs of detecting violations and enforcing the contract in the courts..every contingency cannot be cheaply specified in a contract or even known and because legal redress is expensive...” (p.303).

“The manufacture of dies for stamping parts in accordance with the above specifications [for a Mustang or Ford model] gives a value to these dies specialized to Ford, which implies an appropriable quasi rent in those dies...once the large sunk fixed cost of the specific investment in the dies is made, the incentive for Ford to opportunistically renegotiate a lower price at which it will accept body parts from the independent die owner may be large. Similarly, if there is a large cost to Ford from the production delay of obtaining an alternative supplier of the specific body parts, the independent die owner may be able to capture quasi rents by demanding a revised higher price for the parts. Since the opportunity to lose the specialized quasi rent of assets is a debilitating prospect, neither party would invest in such equipment. Joint ownership of designs and dies removes this incentive to attempt appropriation,” (p.308).

“[I]n 1919 General Motors entered a ten-year contractual agreement with Fisher Body for the supply of closed auto bodies. In order to encourage Fisher Body to make the required specific investment, this contract had an exclusive dealing clause whereby General Motors agreed to buy substantially all its closed bodies from Fisher. This exclusive dealing arrangement significantly reduced the possibility of General Motors acting opportunistically by demanding a lower price for the bodies after Fisher made the specific investment in production capacity,”

“But large opportunities were created by this exclusive dealing clause for Fisher to take advantage of General Motors, namely to demand a monopoly price for the bodies. Therefore, the contract attempted to fix the price which Fisher could charge for the bodies supplied to General Motors...The price was set on a cost plus 17.6 per cent basis [and had other provisions to protect GM].”

“Unfortunately, however, these complex contractual pricing provisions did not work out in practice. The demand conditions facing General Motors and Fisher Body changed dramatically over the next few years. There was a large increase in the demand for automobiles and a significant shift away from open bodies to the closed body styles supplied by Fisher. Meanwhile, General Motors was very unhappy with the price it was being charged by its now very important supplier, Fisher...By 1924, General Motors had found the Fisher contractual relationship intolerable and began negotiations for purchase of the remaining stock in Fisher Body, culminating in a final merger agreement in 1926,” (pp.309-310).