The history of Transactional Cost of Economics (TCE) has its roots somewhere during the second world’s war, when Coase (1937) was trying to find some practical explanations related to the economic theory existing at that time. The differences between the perception of a firm or company and its correspondence in the real world have been assessed, making an empirical analysis of possible attributes that can influence their development in close relation to its internal factors and, and the market interactions as well. Following Coase’s study “The Nature of The Firm”, many other economic papers and theories have emerged in the next decades, leading to the development of different concepts like TCE, vertical boundaries of a company, interactions between company and market and optimal decision for the “make or buy” dilemma as it is mentioned also by (Lafontaine and Slade 2007).
Contributions of Coase and Williamson
The basics for TCE development have been defined by Coase (1937), making an argumentation in favor of lower possible cost of assessing some activities within a company rather than acquiring them from the market by a set of more costly transaction. Also, he has argued that preferential treatments a firm can get from external environments (like governments), combined with the possibility of reducing the market exchange transaction costs (by directing some resources through a defined organization) can be seen as the main reason for a firm to exist and grow.
The dilemma of efficiency versus variable size of a company was also mentioned in his studies with respect to the monopoly avoidance. Clarifying also the differences between initiative and management, he managed finally to find real a relation between theoretical definition of the firm and its practical representation through the equilibrium concept (static or moving one) according to the static or dynamic factors that can influence the internal costs versus the market price mechanisms.
On the other hand, Williamson, who built his work starting from Coase’s findings, was the first to define the term ‘transaction cost economics’ aiming to find a solution for a decrease of exchange costs and avoid or diminish the risks of hold-up problems due to different opportunistic approaches in the market (Hardt 2009).
Williamson developed its theory from behavioral premises, having contract law and psychological attributes embedded and Simon’s concept of bounded rationality due to different cognitive limitations and the opportunism coming from the asymmetric information (Lafontaine and Slade 2007; Hardt 2009).
Williamson’s contribution in the development of TCE is a very important one, recognized by Coase (1993b) himself when saying: “It is clear to me that Williamson’s influence has been immense. In a real sense, transaction cost economics, through his writing and teaching, is his creation” (Hardt 2009, p.47).
Make vs. Buy and TC reduction
Williamson’s (1981) approach to organizational level from the TCE perspective was following three separate layers: (1) first one - the structure of the enterprise as a whole, with inter-relation of its different operating...