Abstract: This paper examines the phenomenon of conflict escalaton in business relations. A theory of when conflict between firms will proceed from informal relationship-preserving norms to more formal and destructive end games involving litigation is developed and tested. The central theoretical claim is that substitution costs serve as an impediment against the escalation of conflict. Data on market concentration and dollar flows between aggregate markets in the economy are used to develop measures of substitution costs. Measures of substitution costs and trade figures are also used to describe power advantages in markets. The theory is tested through a series of regression models. The main findings are that (1) when substitution costs are high, parties are less likely to escalate conflict and (2) asymmetric market relations result in less conflict escalation than symmetric ones. Empirical analysis indicates that substitution costs are related in predictable and meaningful ways to conflict escalation and business litigation.