Transaction cost economics and the firm

This chapter continues the discussion of the previous chapter about models of the firm, with consideration given to models where the firm is something more like a market than a consumer. It considers how a transaction placed within the context of a firm is different from the “same” transaction placed within a market, which is the subject of transaction cost economics. In transaction cost economics, the unit of analysis is the individual transaction. In this theory, firms are not entities, things of the rough category of the consumer; instead firms are institutions, in the rough category of the market. The line between firms and markets is rather fuzzy, but what line there is is drawn along the dimension of the frequency of interaction, the relative permanence of certain legal and market relationships, and the extent to which parties to a transaction are “tied” to one another.