Transaction Cost Theory Of A Firm

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Transaction cost theory of a firm was developed by Ronald Coase. Transaction cost refers to the cost of providing for some services and goods through a market than from within the firm. In order to carry out market transactions it is of essence to determine the people to deal with, to draw up the contract, to conduct negotiation leading to bargains, to undertake the inspection needed to make sure the terms of contracts are being observed as well as drawing up the contract. Course observes that the relationship between firms is governed by market prices are created on a basis that is different from protein maximization. Decisions in the firms are developed through entrepreneurial coordination. The paper will review the empirical literature based on transaction cost theory for a firm’s vertical transaction (Coase, 1937).
Vertical integration
Vertical integration takes place when an organization internalizes one or more steps of its productions steps. Transactional cost theory is believed to be effective in explaining the internalization of some certain stages of manufacturing process. Several approaches have been advanced with an intention of explaining why business organizations extend their range of operation on the vertical chain. A good example is the energy savings associated with the steel production, when downstream organizations utilize still-hot input other than buying steel from external contractors (Coase, 1937). This shows how organizations are able to

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