Tce and Vertical Boundaries Essay

1703 Words7 Pages
TCE and vertical boundaries Introduction The Vertical Chain of production is the process starts of raw materials, and ends with the sales and distribution of the goods. Some firms are “Vertically Integrated”, which means they perform many of the steps in the vertical chain internally. Vertical boundaries of a firm identify what that firm can produce internally, and what to buy from the market. Being “upstream” or “downstream” in the vertical chain, depends on where you are in the vertical chain. At each stage in the chain a firm must decide either to make or to buy from the market. In this article, we will discuss the Make-or-Buy decision under the umbrella of the Transaction Cost Economics or TCE. Transaction costs economics (TCE) was first discussed by Ronald Coase's in “The nature of the firm” (1937). He asked why many economic activities are carried out inside the organization if the market is so efficient? His question was the key to understanding the TCE concept. He challenged that the Management decision of using the market (Buy) or internalize economic exchange (Make) should be taken after comparing the costs of internal coordination; such as the cost of production and the cost of governance, to the cost of using the market, which includes external production cost plus transaction costs. Transaction Costs come from market research, information gathering, and contract negotiating, monitoring, and enforcing. Thus, the study of the Transaction Costs Economics will help to identify the most efficient structure of the organization in terms of using the market or internalize economic exchange. Moreover O.E. Williamson (1975) argues that the Transaction Costs depend on bounded rationality, opportunism and trust, and asset specificity. According to Besanko (2010, p133),” bounded rationality refers to limits on the capacity of individual to

More about Tce and Vertical Boundaries Essay

Open Document