The Transaction Costs Theory of the Firm

The Transaction Costs Theory of the Firm
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The Transaction Costs Theory of the Firm
Transaction cost theory description
The theory regarding transaction cost as put forward by Oliver Williamson and Ronald Coase, highlight that organizations are faced with huge economic costs together with matching economic advantages within the entire transactions or captivities (Carroll, 1999, p.11).
Transaction cost theory attempts to give explanations concerning why companies survive, and why they experience expansion or supply activities towards external environment. This theory presumes that companies attempt to minimize resource exchange costs with environment, as well as attempting to minimize exchange cost bureaucracies in the company (Sautet, 2000, p.7). It is therefore clear that companies weigh resources exchange costs with the involved environment, in opposition to bureaucratic costs regarding accomplishment of activities internally.
The theory perceives markets and institutions as diverse in coordinating and organizing economic transactions (Williamson, 1981, p.549). In cases whereby higher external costs are experienced compared to internal routine costs of the company, growth of the company is experienced, due to the fact that the company has the capacity to accomplish its activities in ways which are cheaper than situations whereby the activities would be accomplished within the market (Dow, 2003, p.21). Nevertheless, in cases whereby the higher technical costs of activities’ coordination are experienced compared to external costs of transaction, it is clear that downsizing of the company will be realized.
In accordance with Coase, companies have the capacity to expand provided that their activities may be carried out cheaply in the company, compared to cases whereby the activities are outsources to external providers within the market (Casson, 2001, p.33). Transaction costs come up when transfer of commodities occurs across separable interfaces in technological terms. For that reason, a rise in transaction costs is experienced whenever transfer of commodities occur across stages, wherein new technological capabilities’ sets are required towards making of the commodities.
Transaction cost theory has been found to consider the assertion that existence of the firm is attributed to its ability to economize upon market-oriented production costs (Williamson, 1988, p.70). Firms turn out to be the most fundamental economic device towards market costs’ reduction. As a result, the effectiveness advantages regarding any firm or organization are looked upon by Coase as supreme in cases whereby contracts in long-term are negotiated. It has been pointed out that long-term contract together with contracts as well as further arrangements which address employment and staffing issues are usually preferred unless negotiation costs and enforcement regarding short-term or se...