Establishing a service channel: a transaction cost analysis of a channel contract between a cruise line and a tour operator

Purpose – The purpose of this paper is to highlight why service firms have difficulty in establishing channels and how transaction costs increase as a result. The paper shows how such difficulties may be overcome a mechanism that uses service capacity strategically. Design/methodology/approach – The paper uses a case study approach, and conducts a transaction cost analysis of the archival data of a cruise line along with the contract between the cruise line and a tour operator. Findings – The results show that service intermediaries aren't able to take inventory and are unable to demonstrate their commitment. Consequently, both parties would be unwilling to establish a contract. However, commitment can be achieved through the intermediary investing in relationship‐specific assets that it could recover, subject to performance. Similarly, the firm could pledge its capacity for its investment in the specific assets. Such a mechanism aligns the interests of both. Practical implications – This case analyses an actual contract between two service firms and the issues surrounding it. Originality/value – As contracts and actual company data of this nature are usually confidential, this paper is useful to provide insights into the process of deliberation and formation of service contracts.