Transaction Cost Economics Theory Analysis

The theory from this years lecture series that I have chosen to explore and evaluate is the Transaction Cost Economics theory, first theorized about by Ronald Coase in 1937. (Coase referred to the model in his article “costs of using the price formula”. The term ‘transaction cost Economics theory’ was not introduced into his work until his much later work, in 1960). I have chosen this specific theory primarily because I find it to be particularly interesting. The initial concepts have been amended significantly and the updated & reformulated versions by subsequent academics, such as Williamson, have modernized the original theory and made it considerably more applicable to the 21st century. I feel that the development of the theory reflects

Suppliers are seen as upstream and buyers downstream. There are three different forms of vertical integration these are, backward, forward and horizontal integration. The aim of vertical integration is to safeguard against opportunism in industries whereby asset specificity is high. The logic being that if an organization was to enter into a contract that relied heavily on investments in highly specific assets, that the actual risk for potential opportunism is relatively high. The benefits of vertical integration include access to markets, a decrease in uncertainty and opportunism on the part of decision makers. The decrease in uncertainty stems from protection from volatility of price influxes and an increase in span of

The reason being that both theories are concerned with the efficient managing of contractual relations. Following the RDT, which assumes that no organisation is capable of generating all of the resources that it needs to operate (Pfeffer & Salanik, 1978). Therefore managers in business engage in structured contracted transactions when exchanging goods and services. These include joint ventures mergers and hierarchical contracts that I have discussed earlier in the essay. RDT is yet again similar to TCE, because it encourages firms to safeguard against the future by becoming more independent of market and environment forces. To me, this is very comparable to the three different forms of vertical integration that I spoke about earlier in this essay. Considering that in essence it is limiting future threats by securing resources into the future and becoming less dependent on other