Transaction cost analysis and the explanation of hybrid vertical interfirm relations

Abstract

Transaction cost economics (TCE), which originally focused on the analysis of markets and hierarchies as alternative mechanisms in the governance of transactions, has lately been geared to the explanation of hybrid vertical relations between firms i.e., neither market nor hierarchy. A careful analysis of the application of TCE to hybrid vertical inter-firm relations shows that the hypothesized relationship between characteristics of transactions and the occurrence of hybrid relations is largely borne out by empirical research. However, by concentrating on the rational utilization of private ordering schemes, TCE fails to give a satisfactory account of the basis underlying hybrid relations and is incapable of explaining developments over time within these relations. Alternative and supplementary approaches are identified, elements of which could be incorporated into TCE in order to strengthen the explanatory power of the theory in these two respects.

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