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Integrating transaction costs theory and real options theory

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  • Ron Sanchez

    (IMD-International Institute for Management Development, Lausanne, Switzerland)

Abstract

This paper develops an integration of transactions costs theory and real options theory that leads to a more complete representation of the problem of economic organizing. By recognizing the opportunity costs associated with internalization of specific-use assets when flexible assets are also available, the integrated theoretical framework provides better insights into optimal strategies for configuring value chains under supply-side and demand-side uncertainty. This expanded model of economic organizing suggests four optimal strategies for configuring value chains and predicts four prevailing forms of economic organization under varying combinations of contracting (supply-side) and market (demand-side) uncertainty. Copyright © 2003 John Wiley & Sons, Ltd.

Suggested Citation

  • Ron Sanchez, 2003. "Integrating transaction costs theory and real options theory," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(4), pages 267-282.
    • Handle: RePEc:wly:mgtdec:v:24:y:2003:i:4:p:267-282
    DOI: 10.1002/mde.1124
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    References listed on IDEAS

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    1. Stulz, ReneM., 1982. "Options on the minimum or the maximum of two risky assets : Analysis and applications," Journal of Financial Economics, Elsevier, vol. 10(2), pages 161-185, July.
    2. Ron Sanchez, 1995. "Strategic flexibility in product competition," Strategic Management Journal, Wiley Blackwell, vol. 16(S1), pages 135-159.
    3. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    4. Johnson, Herb, 1987. "Options on the Maximum or the Minimum of Several Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 277-283, September.
    5. Coase, R H, 1988. "The Nature of the Firm: Influence," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 33-47, Spring.
    6. Coase, R H, 1988. "The Nature of the Firm: Meaning," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 19-32, Spring.
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    10. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Jonathan P. O'Brien & Timothy B. Folta, 2009. "A transaction cost perspective on why, how, and when cash impacts firm performance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(7), pages 465-479.
    2. Andrea Rozsa, 2016. "Development Of Real Option Theory In The Last 20 Years," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 698-709, July.
    3. Darma, Surya & Hakim, Yundi Permadi & Kurniawan A., Erwin & Darma, Dio Caisar & Suparjo, Suparjo, 2022. "Understanding Market Behavior on Corn Commodity: Phenomenon at Year End," Asian Journal of Agriculture and Rural Development, Asian Economic and Social Society (AESS), vol. 12(02), January.
    4. Maley, Jane F. & Moeller, Miriam & Ting, Alina F., 2020. "Sustainable expatriate compensation in an uncertain environment," Journal of International Management, Elsevier, vol. 26(3).
    5. Keith D. Brouthers & Lance Eliot Brouthers & Steve Werner, 2008. "Real Options, International Entry Mode Choice and Performance," Journal of Management Studies, Wiley Blackwell, vol. 45(5), pages 936-960, July.
    6. Max Boisot & Ron Sanchez, 2010. "Organization as a Nexus of Rules: Emergence in the Evolution of Systems of Exchange," management revue - Socio-Economic Studies, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 21(4), pages 378-405.
    7. Idrovo Carlier, Sandra & Costamagna, Rodrigo & Mendi, Pedro & Parra, Juan Manuel, 2019. "Low-skilled labor markets as a constraint on business strategy choices: A theoretical approach," Journal of Business Research, Elsevier, vol. 102(C), pages 228-234.
    8. Swinnen, Johan F.M. & Vercammen, James, 2006. "Uncertainty and Specific Investment with Weak Contract Enforcement," 2006 Annual meeting, July 23-26, Long Beach, CA 21044, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Bartolini, Fabio & Gallerani, Vittorio & Viaggi, Davide, 2008. "Ex-Ante Evaluation Of Agri-Environmental Schemes: Combining Elements Of Private And Public Decision Making," 107th Seminar, January 30-February 1, 2008, Sevilla, Spain 6639, European Association of Agricultural Economists.
    10. Han Smit & Enrico Pennings & Sjoerd Bekkum, 2017. "Real options and institutions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(5), pages 620-644, July.
    11. Ilir Hajdini & Josef Windsperger, 2020. "Real options in franchise contracting: an application of transaction cost and real options theory," European Journal of Law and Economics, Springer, vol. 50(2), pages 313-337, October.

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