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Transaction Cost Theory

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The transaction cost theory (TCT) posits that the appropriate mode of governance for a transaction is defined by several characteristics of that transaction. (Alaghehband et. al, 2011) These are the specificity of the asset(s) exchanged in the transactions, the level of uncertainty (behavioral and environmental) surrounding them as well as the frequency with which they are carried out (Williamson, 1992). All of them influence the costs of the transaction, which are the sum of search and information, the decision, investments in societal relations and the opportunity costs within the boundaries of a firm. The theory predicts the most suitable boundary as well as the relationship for the exchange between two independent firms. Extending Coase’s …show more content…

(Williamson, 1996, p. 105) The more specific an asset is, the harder it is to redeploy and the stronger is the lock-in effect the complementor faces.

Specificity, according to (Williamson, 1981) is divided in: “site specificity, physical asset specificity and human asset specificity”. The first one is associated to the geographical location in which the investment is positioned. For platform ecosystems which deploy as PaaS and manage access to the whole value chain via internet, the physical location of the resources is expected to be of little relevance. The importance of the physical asset specificity is also strongly limited as the platform owner will be interested in providing suitable development and deployment environments which scale for a large number of complementors and products. Thus, third-party firms will expect to consider only the add-on computing power for their product development, if this should be necessary. Human asset specificity in turn plays an important role especially in proprietary platform ecosystems. The need for the firm’s employees to learn the platform specifics, i.e. architecture, interface specifications, as well as the need to develop expertise in the technical and business interaction processes with the platform ecosystem imposes high costs on the complementor. Additionally, investments in relation-specific knowledge might be necessary for the complementor’s developers to properly use the resources provided by the platform owner. The more specific an asset is that the complementor develops the stronger is the lock-in effect and consequently the higher the switching costs are when considering multi-homing. Hence asset specificity will negatively impact the complementor’s propensity to join the

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