Transaction cost analysis

Transaction cost theory is one of the most widely used theories in marketing, management, and economics. The focus of the theory is on explaining how firms organize transactions. The rules by which transactions are organized is called governance. A wide variety of strategic decisions of firms, such as outsourcing, the mode of organizing exports, the use of crowdsourcing, or partner selection efforts, can be analyzed and understood using transaction cost theory. The basic argument of transaction cost theory is that firms economize on costs by choosing a form of governance that minimizes production and transaction costs. We discuss the origins and uses of the theory, critical variables, assumptions, and limitations.