Transaction Cost Theory Essay

1670 Words 7 Pages
E-commerce is a significant and pervasive phenomenon that is impacting not only organizations and societies but also the structure of markets and the economics of distribution channel-structures. Among others, four theories have been widely applied to explain the rapid growth of e-commerce: the transaction cost economics (TCE) theory, the agency cost theory (ACT), the network externality theory, and the long tail theory.
2.1 Theories Review
2.1.1 Transaction Cost Economics Theory (TCE)
TCE theoretically explains why an organization chooses a particular organizational form for a transaction. TCE predicts that the structure of the firm naturally evolves to select the governance structure and degree of outsourcing that minimizes total cost. TCE states that if it is cheaper to produce what it can buy on the market, firms integrate vertically to minimize external business transactions.
The impact of IT on an organization cannot be understood without explicitly considering risk (Clemons & Row, 1992). If the total costs of acquiring a product are less than the total costs of producing it internally, a company will typically choose to outsource. Total costs of acquiring a product include both purchasing and transaction costs. Total costs of producing a product internally include the costs of labor and materials for internal production. Transactions cost is composed of the cost of coordination and the transaction risk (operations risk and

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