Transaction Cost Economics - Fisher Body

The first 200 words of this essay...

This essay draws upon the underlying dimensions of Transaction Cost Economics as a justification of why General Motors (GM) decided to acquire its producer in closed auto-bodies, Fisher Body in 1926.

Prior to the Transaction Cost approach of organisation coined by Ronald Coase, understanding why firms existed was impoverished. Throughout conventional economics, emphasis was placed on mathematical modelling and mindless abstractions in which economists were fixated by what determined price, that any approaches to the study of organisation generally focused on efficiency (Williamson 1981). The theory of perfect competition and monopoly sees the firm as a black box where certain inputs are entered into and as if by miracle, products are produced. Where conventional economics overlook the different ways in which activities can be coordinated, Transaction Cost Economics deems the 'transaction as the basic unit of analysis and holds that an understanding of transaction cost economizing is central to the study of organisations.' (Williamson 1981) Another words, by characterizing the transactions appropriately, it can help address the importance of costs in coordinating, issues regarding vertical integration and the determination of efficient boundaries between firm-type and market-type coordination. Thus, the act of transacting within economic activities is considered the