Economic Restructuring in Primary Industries: Transaction Costs and Corporate Vertical Integration in the Arizona Copper Industry, 1980–1991

Abstract

The recent restructuring of the copper industry in Arizona offers a unique opportunity to evaluate the role of transaction costs in the reorganization of production systems. Contrary to popular assertions that mass production is declining in importance all across the economic landscape, our study documents the existence of firms that are exploiting economies of scale and intensifying vertical integration. Firms that dominate the restructuring process are perfecting their core skills in the industry, restoring reliability in the supply of inputs, and harmonizing decisions at each stage in the vertical chain of production. Moreover, these firms intensified vertical integration by reducing transaction costs. We assess the importance of these cost reductions by comparing the normative allocations of minesite concentration mill outputs to smelters, as generated by a linear programming model that minimizes transportation, labor, and fixed costs, with actual allocations of outputs in the restructured production system. The results show that costs incorporated in traditional models were not actually minimized. The residuals thus represent transaction costs that are unaccounted for by conventional factors-of-production models.

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