Transaction Cost Theory

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  • Topic: Cost, Transaction cost, Theory of the firm
  • Pages : 2 (268 words )
  • Download(s) : 370
  • Published : November 12, 2008
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Transaction cost theory states that the goal
of an organization is to minimize the
costs of exchanging resources in the
environment and the costs of managing
exchanges inside the organization.

Transaction costs are defined as the
costs of negotiating, monitoring, and
governing exchanges between people
Transaction costs result from a combination
of human and environmental factors
Transaction costs result from a combination
of human and environmental factors:

Opportunism and small numbers

Risk and specific assets

Specific assets are investments that
create value in one relationship, but
have no value in another relationship.
Transaction costs are low when these conditions exist:

Organizations are exchanging nonspecific goods and services

Uncertainty is low

There are many possible exchange partners
Transaction costs increase when these conditions exist:

Organizations begin to exchange nonspecific goods and services

Uncertainty increases

The number of possible exchange partners falls

A case in point is the alliance between Nike and Footlocker for the sale of Nike shoes in Footlocker stores. This long-term alliance, which represented a significant amount of the overall business of both players, began to unravel when Footlocker reduced its purchases from Nike to protest at constraints on models and prices, and Nike retaliated by reducing shipments on a much greater scale that Footlocker desired (Wall Street Journal, 2003). The mutual hostage defense can also be undermined in certain institutional contexts. A case in point is a China-based cooperative venture that unfolded when foreign irrecoverable investment in a hotel building became vulnerable to a conflict with a partner, China Youth Travel Service, which was undisturbed by the business consequences .

Quick to the market.
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