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companies choose to produce some goods or provide some services
for themselves and contract with outsiders to provide other goods
and services. Coase explained that relative market prices are
not the sole factor; transaction costs also affect the decision.
The nature and amount of those costs, Coase theorized, frequently
determine whether a company will seek an outside supplier or
service provider or itself supply the item or perform the
service.3 Whatever decision a gas well owner/operator/producer
firm makes in any particular case,4 there is a significant (for
3See Easterbrook, “Derivative Securities and Corporate
Governance,” 69 U. Chi. L. Rev. 729, 729-730 (2002); Tedeschi,
“E-Commerce Report,” N.Y. Times C12 (Oct. 2, 2000).
4A generic description of a range of possibilities similar
to those in the case at hand is found in Joskow, “Asset
Specificity and the Structure of Vertical Relationships:
Empirical Evidence”, in Williamson & Winter, Eds., supra note 2
117, 119:
there is a wide range of institutional arrangements
that can be used to govern transactions between
economic agents. Specific institutional arrangements
emerge in response to various transactional
considerations in order to minimize the total cost of
making transactions. The boundary between a firm and a
market provides a very rough distinction between the
two primary institutional mechanisms for allocating
resources, but this is the beginning, not the end, of
the inquiry. Firms can take on many different
organization structures. Market transactions can take
many different forms ranging from simple spot
transactions [sale at the wellhead for a fixed price]
to complex long-term contracts [various sharing
arrangements present in this case and described in
Tenth Circuit opinion in Duke Energy II]. The specific
set of institutional arrangements chosen would
represent the governance structure that minimized the
total cost of consummating the transactions of
interest.
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