Auctions, Intermediaries and Innovation
Chapter 7: Transaction Cost Theory
7. Transaction Cost Theory 7.1 INTRODUCTION The idea that transactions form the basis of economic thinking was introduced by Commons (1931). Transaction cost theory, originally formalized by Williamson (1975), suggests that transaction costs (TC) are crucial for making or buying decisions and hence impact the choice between the firm (vertical integration) and the market (contracting). Put differently, transaction cost theory is an approach for the explanation of institutions, considering the relative merits of conducting transactions within the firm boundaries in contrast to (inter-firm) market transactions (Black, 2002). In transaction cost theory, the unit of the analysis is the unit of activity – the transaction, with its participants. Hence, it is congruent with this study’s unit of analysis. According to Shelanski and Klein (1995) transaction cost theory’s relational branch is particularly relevant to this study as it aims to explain how trading partners choose from the set of feasible institutional alternatives. Within the context of open innovation, firms increasingly transfer technologies across their own firm boundaries. Therefore, they need to choose transaction partners. Particularly IIP managers face make-or-buy decisions (that is whether to acquire a technology or to develop it internally) and whether to keep a technology internally or to exploit it externally (that is the keepor-sell decision). However, this study is not primarily concerned with these decision types. Instead, it contributes to the understanding of the questions that follow when these decisions have been made. Having decided to not develop a technology within the firm’s own R&D centers, but to...
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