Transaction cost theory

Developed by Ronald Coase in 1932 as part of a lecture given to students at the School of Economics and Commerce in Dundee, Scotland, then turned into a paper titled, "The Nature of the Firm." At its core is this notion: When a company tries to determine whether to outsource or to produce goods or services on its own, market prices aren't the sole factor. There are also significant transaction costs, search costs, contracting costs and coordination costs. Those costs frequently determine whether a company uses internal or external resources for products or services. This is the essence of the make-vs.-buy decision.

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