Law & Economics Working Papers
This paper revisits two examples of vertical integration in the early automobile industry: GM and Fisher Body on the one hand and Ford Motor and Keim Mills on the other. The paper shows that asset-specific investment and the fear of hold-up played at best a negligible role. What mattered in the case of GM and Fisher Body was close coordination of assembly operations. In the case of Ford Motor and Keim Mills, vertical integration was an important step (but only one of many) that Henry Ford took to ensure that his production team remained intact. In the case of GM and Fisher Body, GM's decision to coordinate the assembly of Chevrolet components, including car bodies, at multiple locations proved crucial. Shipping complete car bodies and storing them at each Chevrolet assembly plant was expensive and unwieldy. Instead, Fisher Body shipped sheets of stamped metal to assembly plants built at GM’s expense adjacent to each new Chevrolet assembly plant. At these plants, Fisher Body coordinated the welding of the sheets into car bodies with Chevrolet's production team. The close coordination of these plant level operations made the activities of Fisher and Chevrolet indistinguishable from most activity that takes place inside a conventional firm. These production efficiencies made vertical integration sensible, but the date of formal legal integration came late and was not itself of great moment. The success of the Model T depended crucially on Henry Ford's ability to keep his production team together. Many team members worked initially for Keim Mills, and Keim became a subsidiary of Ford. But, as in the case of GM and Fisher Body, the formal legal event marking vertical integration of Ford and Keim did not coincide with the important economic events. The members of the Keim Mills team designed the Model T well before vertical integration, and their later contributions came only when they moved from Buffalo to Detroit, something that was independent of and took place after vertical integration. The value of the Model T depended crucially on the members of the team Henry Ford put together, but relatively little on whether, as a legal matter, the Ford Motor Company employed them.
Douglas G. Baird, "In Coase's Footsteps" (John M. Olin Program in Law and Economics Working Paper No. 175, 2003).