By Dean V. Williamson*
To answer the question, “What is institutional and organizational economics (IOE)?” would be to go some way toward illuminating the influence of Oliver Williamson on economics and on the social sciences more generally. There was a time, however, when there effectively was no IOE. The way parties to (possibly complex) exchange organized their collaborations was simply not something that was even cognizable from the perspective of the orthodox, textbook economic theory. It gets worse. From the perspective of the orthodox theory, it was not obvious that anyone should have to concern themselves with organization. Implicit in the established theory was an ambitious and optimistic proposition: Organization is all well and good, but one can analyze the efficiency and design of economic systems without reference to organization – that is, to the messy processes parties to exchange might use to manage their relationships. Organization was just a distraction from the real action. Researchers could ignore those distractions and adopt the ultimate “as if” proposition: the neoclassical theory of decentralized market processes could encompass and digest any relevant inquiry. And, yet, almost anyone else, whether a social scientist or not, might agree that “Organization matters!” But how? Why? What does that mean? Does it matter?
I am not situated to fully unravel the mysteries of the how and why in the space of a short essay. Suffice to say, the optimistic “as if” proposition has left a lot of enduring puzzles about economic organization on the table. For example, it left it to a 21-year old Englishman to observe something so obvious that it was profound. In his 1937, “The Nature of the Firm”, a young Ronald Coase could observe that the established theory of his time could not even recognize a role for firms, and yet anyone could look out on the world and see that economies were populated with these pockets of administrative, nonmarket activity (firms). Did this really not matter?
It turns out it does matter, but only after one admits a role for organization. And wherever there is scope for organization, there are tradeoffs. And where there are tradeoffs, there is the question of managing those tradeoffs. That is, there is scope for economic analysis. Hence, “institutional and organizational economics” in all its unavoidably messy glory.
My homework assignment here is to suggest something about the contributions of “Olly” and, by extension, of IOE to the practice of antitrust. One might wonder how it is that a body of theory that still struggles to characterize “the firm” would be situated to illuminate anything about the antitrust enterprise, but there are discrete contributions. I start, however, with the observation that contributions are right now being made – and the IOE should participate. Specifically, the Antitrust Division of the US Department of Justice has resurrected efforts to craft Vertical Merger Guidelines to complement its well established editions of Horizontal Merger Guidelines. How is it that a merger that is “vertical” in that it enables merging parties to join complementary assets and capabilities can harm competition? Do the efficiencies that obtain from combining such assets and capabilities outweigh prospective harm to competition? Finally, can’t parties to a prospective merger achieve such efficiencies by contract rather than full-on merger?
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*Dean Williamson worked in the Antitrust Division of the Department of Justice for 20 years and is Oliver Williamson’s son.