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Strategy and Organisation Chapter 10 Summary: Transaction Cost Economics
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A detailed summary of chapter 10 of the book: Strategy and Organisation of Utrecht University
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Chapter 10: Transaction cost economicsIn transaction cost economics the fundamental unit of analysis is the
transaction. Transactions can take place across markets or within
organizations. Transaction cost economics emphasizes that transaction
costs as well as traditional production costs should be taken into account.
Behavioural assumptions: bounded rationality and opportunism
Bounded rationality
Bounded rationality means that the capacity of human beings to
formulate and solve complex problems is limited. Bounded rationality will
pose a problem only in environments that are characterized by
uncertainty/complexity.
Opportunism
Opportunism can be described as 'self-interest seeking with ingenuity' and
as making 'self-disbelieved statements'. Opportunism may involve
outright lying and cheating, but it may also involve more subtle twists to
the truth. Opportunism means trying to exploit a situation to your own
advantage. Opportunistic behaviour can occur ex ante (a seller might not
tell you about defects before you buy) or ex post (after you have booked a
holiday you might want to back out of it). Ex ante opportunistic behaviour
can only occur when there is asymmetrical information: the seller has
information that potential buyers do not have.
If there are a large numbers of sellers and buyers who trade with each
other on a regular basis the sellers need to beware not to damage their
reputation. If there is only one seller, he does not have to worry about
reputation because buyers do not have an alternative. There is a problem
only if opportunism occurs in conjunction with small numbers of trading
partners, which is termed small numbers of exchange.
Atmosphere
The atmosphere factor refers to the fact that participants in transaction
may value the mode of the transaction (that is, whether a transaction is
governed by the market or an organization). In the framework of
transaction cost economics, the atmosphere factor refers to the local
environment in which the transaction takes place.
The fundamental transformation
Through learning by doing, the original situation, involving a large number
of bidders, is transformed into a situation of monopoly: the experience
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