Transaction Cost Economics (TCE)

Overview

TCE explains firm boundaries by analyzing the costs of conducting transactions. Williamson (1975, 1985) argues that governance structures (market, hybrid, hierarchy) are chosen to minimize the sum of production costs and transaction costs, given bounded rationality and opportunism.

When to Use

• Make-or-buy decisions
• Evaluating outsourcing, alliances, or vertical integration
• Designing contractual safeguards for inter-firm transactions
• Analyzing why certain industries are more vertically integrated

Assumptions