Power plays: Regulation, diversification, and backward integration in the electric utility industry

Abstract

This paper explores how regulatory oversight influences strategic management. Predictions of the extent to which a firm diversifies and integrates upstream based on transaction-cost economics are developed and then tested among 49 American electric utilities from 1974 through 1986, a period that witnessed increasingly hostile regulatory relations. The results confirm the influence of regulation on both diversification and backward integration, supporting the transaction-cost view of these phenomena. The implications of these findings for the study of interorganizational relations, the concept of implicit contracting as a governance mechanism, and the pursuit of longitudinal theory-building are discussed.