Transaction Cost Analysis
Transaction Cost Analysis as Framework
According to TCA, a transaction is the transfer of goods or a service and the analysis of transactions emphasizes on achieving efficiency in their administration (Rindfleisch & Heide 1997). Firm is a particular form of organization for administering transactions between one party and another and is characterized as a managerial hierarchy. In contrast, market governance is characterized as transaction taking place without managerial oversight. Firms exist because they can sometimes reduce the costs of negotiating and enforcing terms and conditions of exchange relative to market transacting. Transaction costs may consist of ex ante and ex post costs. In the sales service setting, the ex ante costs include the expense of searching for an independent representative and negotiating the price and contract. The ex post costs, such as incompetent sales service (e.g. not meeting sales quota), are incurred after the contract has been signed but before the entire transaction has been completed. If the cost of organizing an exchange in a market exceeds the cost of coordinating the exchange in a firm, the company may go for in house sales, and vice versa.
Williamson’s TCA framework rests on two assumptions about human behavior: bounded rationality and opportunism. First, individuals in a company are bounded rational. It is impossible for a man to foreknow all probabilities and matters that will occur in the future. This limitation makes it impossible to structure perfect contracts. It is also the case that any contract will be incomplete even if all information is available. In fact, environmental uncertainty and behavioral uncertainty worsen the situation. First, environmental uncertainty leads to difficulties in revising the agreement to fit the changing situation. Second, behavioral uncertainty becomes problematic in evaluating whether the performance adhering to the established agreement (Rindfleisch & Heide 1997).
According to TCA, a transaction is the transfer of goods or a service and the analysis of transactions emphasizes on achieving efficiency in their administration (Rindfleisch & Heide 1997). Firm is a particular form of organization for administering transactions between one party and another and is characterized as a managerial hierarchy. In contrast, market governance is characterized as transaction taking place without managerial oversight. Firms exist because they can sometimes reduce the costs of negotiating and enforcing terms and conditions of exchange relative to market transacting. Transaction costs may consist of ex ante and ex post costs. In the sales service setting, the ex ante costs include the expense of searching for an independent representative and negotiating the price and contract. The ex post costs, such as incompetent sales service (e.g. not meeting sales quota), are incurred after the contract has been signed but before the entire transaction has been completed. If the cost of organizing an exchange in a market exceeds the cost of coordinating the exchange in a firm, the company may go for in house sales, and vice versa.
Williamson’s TCA framework rests on two assumptions about human behavior: bounded rationality and opportunism. First, individuals in a company are bounded rational. It is impossible for a man to foreknow all probabilities and matters that will occur in the future. This limitation makes it impossible to structure perfect contracts. It is also the case that any contract will be incomplete even if all information is available. In fact, environmental uncertainty and behavioral uncertainty worsen the situation. First, environmental uncertainty leads to difficulties in revising the agreement to fit the changing situation. Second, behavioral uncertainty becomes problematic in evaluating whether the performance adhering to the established agreement (Rindfleisch & Heide 1997).
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