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Transactional Cost Theory and Empirical Studies Essay

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Updated: Jul 8th, 2021

Transactional cost theory is one of the many tools used in marketing and management that affects the make versus buy decision-making. It involves calculating the costs of outsourcing the production of services and products to third parties versus creating them domestically (Vaxevanou & Konstantopoulos, 2015). The costs involved include transaction costs, contracting costs, coordination efforts, and searching for new suppliers, among other equally valid concerns (Brim, 2017). Because of its universal applicability to a variety of scenarios including economics, it is frequently used to inform corporate and governing policies through empirical studies. The purpose of this paper is to provide examples of the application of the theory by analyzing academic articles found on the web.

Transactional Cost Theory: Empirical Evidence

Transactional cost analysis is frequently implemented in the selection of outside marketing channels. The article by Suhaimi, Aisyah, de Mey, and Oude Lansink (2017) utilizes empirical data to determine the most effective marketing channels available to the farmers in Malaysia. The multivariate analysis utilized several variables, such as price selection, delay of payment, trust in the buyer, price fluctuations and expectations, as well as the provision of farm services.

An article by Zachary (2017) investigates the use of transactional cost theory to improve accounting practices. According to his findings, indirect cost measurements are usually underused by the majority of cost accountants at the department or service levels. Empirical data can be used to inform these practices, and the major parameters could be extracted from the transactional cost theory (TCT).

Zhang, Ma, and Qu (2017) analyze hotel outsourcing decisions concerning transactional cost and resource-based theories. The primary variables for their empirical research involved provider performance, communication, and cost reduction. The study concluded that hotels in China should outsource suppliers based on cost-efficiency, specialization, and long-term commitments. Loch and Gregg (2018) applied transaction cost theory in their study of managing the salinity of the Murray-Darling Basin. Salinity management programs have plenty of costs associated with the delegation of various tasks to subcontractors.

The primary variables associated with costs included cultural flow assessments, erosion and flora monitoring, and safety reviews. The article found that the management program applied at the site managed to drive down associated costs over time.

The article by Gorovaia and Windsperger (2018) applied a transactional cost theory analysis to the choices of contract durations in franchising networks. The empirical variables in the study included positive brand names, investments between franchisors and franchisees, and contract durations. The correlation between positive brand names and contract durations was discovered. Transactional cost theory can be applied in governmental organizations as well as incorporate ones.

Bennett (2016) analyzed the welfare-to-work contract system used in Great Britain. The analysis of empirical data indicated that the 2008 commissioning reforms have effectively increased the costs of outsourcing by creating an additional layer of bureaucracy between customers and subcontractors. These findings are supported by Wacker, Yang, and Sheu (2016), who highlight the importance of internal and external governance to reduce costs.

Ping Ho, Levitt, Tsui, and Hsu (2015) analyze public-private partnerships (PPP) through the lens of transactional cost theory. According to their analysis of empirical data, the greater pooling of resources found in PPPs is offset by inherent inefficiencies in the system, which induces additional costs due to a poor governance structure. Madanoglu, Memili, and de Massis (2019) came to similar conclusions while analyzing the PPPs in home-based family firms. Transactional cost theory and analysis find application in investment research. Rygh and Benito (2017), equity and debt are the two primary factors influencing transactional costs in foreign direct investment. Equity is affected by the presence or lack of knowledge, whereas debt is a more useful statistic for multinational enterprises.

Che, Peng, Lim, and Hua (2015) use the theory to analyze the antecedents for consumers’ intention to revisit a site and make a purchase, which is important in online marketing. The primary antecedents in the cost analysis included the product price, provision, relevancy, and visit channels as the primary factors to affect online buying behaviors. As shown by Chen (2017), transactional cost theory can also be applied to predict and calculate the costs associated with persuading customers to make a repurchase of items from the company. Lastly, Lin and Lin (2018) investigate the influence of the transactional cost theory in the analysis of medical advice-seeking behaviors. As evidenced by this empirical study, the main factors to be included in the statistical analysis include the actual price, treatment methods, and transparency of the procedures. These factors can reduce costs by attracting more customers to the company.

Conclusions

As it is possible to see from the analysis of the empirical studies above, corporate governance can use the transactional cost theory to inform its marketing efforts, advertising, project customer reactions, and analyze the effectiveness of relationships with suppliers and subcontractors. It is a very useful tool that can be applied to nearly any situation that involves the potential delegation of authority. In many cases, delegation is more cost-efficient, as the benefits of producing services and materials domestically are often offset by an inefficient governing structure.

References

Bennett, H. (2016). Re-examining British welfare-to-work contracting using a transaction cost perspective. Journal of Social Policy, 46(1), 129-148.

Brim, O. (2017). The economic theory of representative government. New York, NY: Routledge.

Che, T., Peng, Z., Lim, K. H., & Hua, Z. (2015). Antecedents of consumers’ intention to revisit an online group-buying website: A transaction cost perspective. Information & Management, 52(5), 588-598.

Chen, L. S. (2017). Application of transaction cost theory on repurchase intention. Advances in Intelligent Systems Research, 131, 297-300.

Gorovaia, N., & Windsperger, J. (2018). The choice of contract duration in franchising networks: A transaction cost and resource-based view. Industrial Marketing Management, 75, 125-133.

Lin, S. H., & Lin, T. M. Y. (2018). Medical advice-seeking behaviors based on transaction cost theory. Cost Effectiveness and Resource Allocation, 16(65), 1-6.

Loch, A., & Gregg, D. (2018). Salinity management in the Murray-Darling Basin: A transaction cost study. Water Resources Research, 54(11), 8813-8827.

Madanoglu, M., Memili, E., & de Massis, A. (2019). Home-based family firms, spousal ownership and business exit: A transaction cost perspective. Small Business Economics, 1-16.

Ping Ho, S., Levitt, R., Tsui, C. W., & Hsu, Y. (2015). Opportunism-focused transaction cost analysis of public-private partnerships. Journal of Management in Engineering, 31(6), 04015007.

Rygh, A., & Benito, G. R. G. (2017). Capital structure of foreign direct investments: A transaction cost analysis. Management International Review, 58(3), 389-411.

Suhaimi, M., Aisyah, N., de Mey, Y., & Oude Lansink, A. (2017). A transaction cost analysis of Malaysian dairy farmers’ marketing channel selection. 2017 International Congress, 1-14.

Vaxevanou, A., & Konstantopoulos, N. (2015). Models referring to outsourcing theory. Procedia – Social and Behavioral Sciences, 175, 572-578.

Wacker, J. G., Yang, C., & Sheu, C. (2016). A transaction cost economics model for estimating performance effectiveness of relational and contractual governance. International Journal of Operations & Production Management, 36(11), 1551-1575.

Zachary, M. (2017). Cost accounting at the service level: An analysis of transaction cost influences on indirect cost measurement in the cost accounting plans of large us cities. Public Administration Quarterly, 41(1), 91-129.

Zhang, Y., Ma, E. J., & Qu, H. (2017). Transaction cost and resources based views on hotels’ outsourcing mechanism: An empirical study in China. Journal of Hospitality Marketing & Management, 27(5), 583-600.

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