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A Transaction Cost Approach to Make-or-Buy Decisions

This study delves into the transaction cost approach for make-or-buy decisions, exploring factors like market competition, uncertainty, and asset specificity. It discusses the interplay of volume uncertainty, technological uncertainties, and comparative production costs influencing such decisions.

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A Transaction Cost Approach to Make-or-Buy Decisions

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  1. A Transaction Cost Approach to Make-or-Buy Decisions Gordon Walker David Weber

  2. Research Question • Make-or-buy decisions as a paradigmatic problem for analyzing transaction costs; • How supplier market competition, volume uncertainty, technological uncertainty, and comparative production costs between buyer and supplier affects make-or-buy decision?

  3. TCE and Make-or-Buy Decision • Two dimensions: • (1) the uncertainty associated with executing the transaction and; • (2)the uniqueness or specificity of the assets associated with the goods or service transacted. • Main Arguments: individuals have limited information-processing capacity and are subject to opportunistic bargaining, high uncertainty makes it more difficult for the buyer of the goods or service to evaluate the supplier's actions, and high asset specificity makes opportunistic supplier decisions particularly risky for the buyer.

  4. Literature Gap • In addition to vertical integration, this paper also discusses vertical de-integration; • Asset specificity and uncertainty are allowed to influence make-or-buy decisions independently; • Sufficient uncertainty was inherent in all transactions included in the study to make it very difficult for the buyer to neutralize potential supplier opportunism effectively through contingent claims contracts (Williamson, 1975: 22); therefore any increase in asset specificity would tend to increase transaction costs. • Because of the way that types of uncertainty we studied influenced transaction costs, we assumed they did so independent of the level of asset specificity.

  5. Theoretical Development: Uncertainty Volume Uncertainty + Make Technological Uncertainty + - Buyer Experience

  6. Theoretical Development: Competitive Production Cost Competitiveness of Supplier Market + Supplier Production Cost Advantage + Buy - Buyer Experience

  7. Methodology

  8. Methodology • The data consisted of 60 decisions made in a component division of a large U.S. automobile manufacturer over a period of three years. The sample of 60 emerged by exception from the roughly 20,000 parts the division used for assembly. • The production of 20 components, out of 49 previously made, was shifted to the market, and four out of nine components previously bought were brought inside the firm. Two components in the sample were new. • Questionnaire? Interview? • Unweighted least squares (ULS) procedure of Joreskog and Sorbom (1982).

  9. Results • Supported: Volume uncertainty and comparative production costs • Moderately Supported: Competitiveness of Supplier Market • Not Supported: Technological Uncertainty and Buyer Experience

  10. Discussion • Empirical Problem: small sample, not generalized, model, etc. • Measurement of make-or-buy: binary or non-binary • Mixed support of TCE • Old good days: few hypotheses aresupported • Uncertainty and Asset Specificity: joint or independent?

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