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Transaction cost theory

6 important questions on Transaction cost theory

What is the transaction cost theory?

A theory that says the goal of an organisation is to minimise the costs of exchanging resources in the environment and the costs of managing exchanges inside the organisation.

There are three different sources to transaction costs that results from a combination of human and environmental factors:
Environmental uncertainty and bounded rationality
Opportunism and small numbers
Risk and specific assets
Describe the different sources of transaction costs.

Environmental uncertainty and bounded rationality

People have limited ability to understand the environment surrounding them -> Therefore bounded rationality

The higher uncertainty in the environment, the more difficult it is to manage a transaction.

Opportunism and small numbers

When people or organisations cheat forces or stakeholders in the environment.
The small the number of suppliers, the greater the chance for opportunism -> Organisations at risk spend more money to protect themselves (High transaction costs)

Risk and specific assets

Investments for a single relationship that cannot be used later to other firms

Risk of being trapped/ blackmail

There is a connection between the transaction costs and the inter organisational linkage mechanism. What three conditions exist when transaction costs or low and what three conditions when they are high?

Low costs:

Trade of non-specific goods and services
Low uncertainty
Many possible trade partners

High costs:

Trade of specific goods and services
Higher uncertainty
Low possible number of trade partners

What are bureaucratic costs?

Costs that appear internal in the organisation from monitoring employees.

Why is the transaction cost theory a good way to choose an organisation's interorganisational strategy as opposed to the resource dependence theory?

The transaction cost theory weighs the costs saved from the linkage mechanism against the bureaucratic costs of operating the linkage mechanism.
Organisations are able to make better predictions based on the costs with different linkage mechanisms and thereby reduce uncertainty.

The three strategies mentioned to control interdependencies in an organisation are:
Keiratsu
Franchising
Outsourcing
Describe the the organisational strategies.

Keiratsu

Formal linkage without incurring costs
Avoids uncertainty and opportunism.

Ex. Toyota avoids costs but has a say in its supplier's businesses.

Franchising

Symbiotic interdependence
The franchisees own the business to avoid bureaucratic cost in the main concern.

Outsourcing

When no extra value is added through the costs of internalised production/ Bureaucratic costs -> Outsourcing

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Principles of organization

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Transaction cost theory

6 important questions on Transaction cost theory

What is the transaction cost theory?

There are three different sources to transaction costs that results from a combination of human and environmental factors:Environmental uncertainty and bounded rationalityOpportunism and small numbersRisk and specific assetsDescribe the different sources of transaction costs.

There is a connection between the transaction costs and the inter organisational linkage mechanism. What three conditions exist when transaction costs or low and what three conditions when they are high?

What are bureaucratic costs?

Why is the transaction cost theory a good way to choose an organisation's interorganisational strategy as opposed to the resource dependence theory?

The three strategies mentioned to control interdependencies in an organisation are:KeiratsuFranchisingOutsourcingDescribe the the organisational strategies.

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There are three different sources to transaction costs that results from a combination of human and environmental factors:
Environmental uncertainty and bounded rationality
Opportunism and small numbers
Risk and specific assets
Describe the different sources of transaction costs.

The three strategies mentioned to control interdependencies in an organisation are:
Keiratsu
Franchising
Outsourcing
Describe the the organisational strategies.