Integrating transaction costs theory and real options theory

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.