C g c g 5 following williamsons notation 6 k k ˆ k

C 
G C   
G 
5
Following Williamson’s notation.
6

k k
ˆ
k
Figure 1. Comparative production and governance costs
Source: Williamson 1985, p. 93
The result G C k k
M
     ) ( ) (

  is depicted in Figure 1. We can
review three situations:
1. 0 ) ( ) (       G C k k
M 
 
The difference in total costs G C    lies above the horizontal
access, which implies that the firm would achieve a greater profit by
buying the item from the market rather than producing it. What we
observe in this case is that the firm’s profit is a direct function of asset
specificity where for low values of asset specificity below a critical
value
k
ˆ
buying the item promises greater returns than making it in the
make-or-buy decision.
2. 0 ) ( ) (       G C k k
M 
 
This is the point of indifference where some particular asset
specificity
k
ˆ
yields the same profits within and outside the firm. It is
irrelevant to the firm which mode of procuring the item it would choose
– to make or to buy it.
3. 0 ) ( ) (       G C k k
M 
 
For a very high asset specificity where actual asset specificity
exceeds the critical value
k
ˆ
the profit of making the item exceeds that
of buying it on the market. Profitability of producing to one’s own
requirements increases with asset specificity, while that of buying from
the market decreases. We can demonstrate the effect of asset
specificity on individual profits with the help of differentiation
0 





 


k
M
k
C
k
M M

As both partial derivatives on the right are positive, profitability
of obtaining the item through the market falls with the increase in
asset specificity. Asset specificity does not favor market procurement.
0 





 


k k
C
k


 
7

The effect of asset specificity on the profit of producing the item
is positive which implies that asset specificity favors own production.
This conclusion follows from the fact that the two partial derivatives on
the right are negative. As an industry matures, the uncertainty in it
decreases and the benefits that accrue to vertical integration
presumably decline. This means that vertical integration would mostly
be observed in relatively new industries and in sectors producing new
products. Thus, the emerging pharmaceutical sector in Bulgaria
appears to be a good host for vertical integration. Larger firms will be
more integrated into components than smaller ones, ceteris paribus . A
multidivisional form firm will be more integrated than a unitary form
firm, ceteris paribus .
Integration of peripheral activities includes backward integration
into basic materials, lateral integration into components and forward
integration into distribution. Forward integration into wholesaling is
observed for products that need coordination of marketing and
distribution, where branding is practiced or products require special
handling. For products and industries where product differentiation is