Beruflich Dokumente
Kultur Dokumente
Antonio Cordella
Abstract
Transaction cost theory has often been used to support to support the idea that information and
communication technology (ICT) can reduce imperfection in the economic system.
Electronic markets and hierarchies have repeatedly been described as solutions to inefficiencies
in the organisation of transactions in complex and uncertain settings. Far from criticising this
assumption, this paper highlights the limits associated with this application of transaction cost
theory that has been prevalent in IS research. Building on the concepts first proposed by Ciborra,
the paper argues that information-related problems represent only some of the elements
contributing to transaction costs. These costs also emerge due to the interdependencies among
the various factors contributing to their growth. The study of the consequences associated with
ICT design and implementation, grounded in transaction cost theory, should therefore consider
the overall implication ICT has on these interdependences and not only the direct effect it has on
on information flow, distribution, and management.
Introduction:
The diffusion of information and communication technology (ICT) in society is always
associated with an increased amount of information becoming available. Moreover, information
society is not only defined by the greater amount of information required in an ever increasing
range of human activities, but also by the expanded number of sources from which information
emanates. A significant volume of unwanted unsolicited information is received via traditional
physical channels of communication such as post, but increasingly, more is being sent via ICT
such as e-mail and the Internet. In an era of ever shortening product life cycles and lead times, it
has become essential for companies to improve their internal and external information flows.
More information is necessary to deal with emergent complexity, dictating a requirement for
faster information processing. A key resource for survival in this new environment is the ability
to obtain access to more information and to be able to manage this information flow. As Lewis
(1996) states: professional and personal survival in modern society clearly depends on our
ability to take on board vast amounts of new information. Yet that information is growing at an
exponential rate.
ICT has become the major enabler of the efficient exchange and retrieval of information in
organisations. However, conflicting approaches indicate that ICT is either a powerful tool to
support the economic system managing information or, conversely, one that creates a more
complex environment that is difficult to manage. A clear indication of the first perspective is
found in ICT studies based on the transaction cost approach (Malone et al., 1987; Ciborra, 1993;
Wigand et al., 1997). Such studies argue that ICT supports the economic system, providing a
more efficient information flow that facilitates the interaction among economic agents under
complex and uncertain circumstances, and reducing transaction costs. On the other hand, the
literature addressing the problem of information overload underlines the negative effects of
ICT due to a greater level of complexity being faced as a consequence of the increased quantity
of information made available by the technology (Palme, 1984; Schultze and Vandenbosch,
1998).
While being cognisant of these different approaches to the effects of ICT on organisational
settings, this paper will focus only on the transaction costs approach, depicting that it is possible
to identify situations where rather than reducing transaction costs, ICT will increase them.
Building on Ciborras (1993) work on transaction costs theory (TCT) and ICT, the paper will
present the main elements of the theory to discuss the effects of ICT on the different dimensions
of the transaction cost model. The paper highlights the importance of considering the
interdependency among the factors contributing to transaction costs when ICT is designed and
implemented to reduce the effects of these factors on transaction costs.
The paper is organised in a number of sections: Section two reviews transaction costs theory;
section three presents a summary of Ciborras contribution to information system research and
TCT; section four summarises the debate on TCT and ICT; section five reviews how this
literature has often underestimated the importance the interdependencies between the various
factors contributing to transaction costs to explain the overall effect of ICT on transaction costs;
section six reflects on any possible strategic implications from the ideas proposed in the paper.
Transaction costs
The need for a better understanding of the impact of ICT on organisational structures, such as
markets and hierarchies, has increased the attention received by transaction costs theory in the
study of information systems. Transaction costs theory represents one of the first attempts to
develop a comprehensive theory that considers the structure of the firm as a source of
explanation for outcomes, in contrast to viewing the firm as a black box that has little influence
in explaining such outcomes.
Presenting a minimalist version of the theory, Williamson (1975, 1985) and Coase (1937)
considered the cost of organising and managing the firm as analogous to the cost of constructing
and working in an ideal organisational structure. In contrast, transaction costs were depicted as
analogous to the costs associated with the management of the imperfections of this structure. In
economic terms, the ideal structure (i.e. the one without imperfections), would be a perfectly
informed and efficient market where prices were sufficient to communicate to dispersed buyers
all the knowledge required to make a purchase decision (Hayek, 1945). Through the price
mechanism, the market efficiently collects and transfers a large amount of information between
economic agents; information that would be prohibitively costly to capture and distribute by
other means.
Defining the elementary unit of analysis as the economic exchange between at least two
individuals, the transaction costs model depicts the exchange process with reference to the
resources that required to execute this exchange. While in the optimal case these costs approach
zero, when imperfections occur, these costs increase. Inefficiencies and imperfections in the
organisation of the transactions, called market failures, are the result of information and
behavioural-related problems, with these imperfections defining the complexity of the
transaction (Ciborra, 1993). Economic agents invest in resources to mitigate the effects of these
imperfections in the execution of the exchange. These investments are the costs associated with
the transactions, and defined as transactions costs. Transactions costs are the consequence of the
asymmetrical and incomplete distribution of information among the economic agents involved in
the transaction. More specifically, every transaction life cycle is characterised by different cost
phases, with each incurring specific information-related costs:
- Search costs: the costs of locating information on the opportunities for exchange
- Negotiation costs: the costs of negotiating the terms of the exchange
- Enforcement costs: the costs of enforcing the contract
Transactions will conclude successfully only when all the participating agents possess the
necessary information to rationally assess the equity of the exchange.
When costs reach a particular level, it can be more convenient to re-organise the exchange
processes within a structure that more adequately addresses uncertainty and information
asymmetry. This shift in the organisation of transactions occurs in order for the effects of
transaction costs not to jeopardise the opportunity to conclude an exchange that is advantageous
to all the involved parties. The model proposes a theoretical apparatus that assists in explaining
why alternative forms in the organisation of transactions exist.
Markets and hierarchies are proposed as alternative forms in the governance of transactions.
Adhering to the underlying assumptions of the theoretical model, transactions that take place
once, such as those on the spot markets, will incur relatively little transaction costs because
they are associated with a low level of uncertainty (both environmental and strategic). In these
cases it is straightforward to collect all the required information and to manage this information
using the price mechanism. On the other hand, transactions that involve a commitment over time
have a certain level of endogenous uncertainty related to the future behaviour of agents and of
resource dependencies established within the transactional process (Barney and Ouchi, 1986).
To manage these contingences, investment in resources and strategies designed to address
emerging challenges is required. These solutions are maintained by the development and
enforcement of rules and regulations that produce a new coordination mechanism to replace the
price mechanism. TCT argues that the alternative to the market found in organisational forms
and hierarchies, are responses to the need to minimise the transaction costs associated with the
management of transactions (Coase, 1937; Alchian and Demsetz, 1972; Williamson, 1975). This
both explains and justifies the decision to reorganise the transaction process. The hierarchy
organises exchanges on the basis of rules and procedures within a regulatory framework that is a
substitute for prices. Long-term commitment and contractual arrangements are developed to
reduce the uncertainty facing agents, while enforcing alternative ways to organise the exchange
process (Varian, 1992). The cost associated with the transaction will be lower than the one that,
ceteris paribus, would be supported if the exchange was managed through a market mechanism.
The same uncertainty is managed by a more efficient mechanism, the hierarchy, based on
adherence to predefined norms and rules.
Transaction costs theory explains the existence of alternative forms of organisation on the basis
of their relative efficiencies in response to the combined effects of environmental factors
(uncertainty and small numbers) and human factors (opportunism and bounded rationality)
(Williamson, 1975; Moe, 1984). Transaction costs for a specific exchange can be captured by the
function:
Tc = f(U;C;Br;Ia;As;Ob;Cc)
This is a significant point that will be iterated later in this paper when a discussion occurs of the development of the ideas first
produced by Ciborra, in relation to the introduction of ICT as possible instruments in lowering transaction costs.
reduce transaction costs. Ciborras (1993) book Teams, Market and Systems is a significant
contribution to this debate. Following TCT, this work discusses how it is possible to formulate
alternative ICT solutions to enforce the different transactional mechanisms of teams, markets,
and hierarchies. What characterises the originality of this contribution is its depth and extensive
analysis of alternative transactional mechanisms, in addition to depicting the proposed solutions
in terms of ICT development driven by TCT. Additionally, a framework is proposed that guides
the decisions steps to be followed when assessing the cost-benefits associated with these
alternative choices. Building upon the ideas proposed by socio-technical studies, Ciborra (1993)
suggests that ICT solutions designed to lower transaction costs should follow the efficiency
criterion when designed: cost-benefit analysis is proposed as the optimal approach to aid such
design.
Following this paradigm, Ciborra (1993) discusses alternative architectures by adapting the
analytical model proposed by Williamson (1985) to appreciate how technology and
organisational forms jointly can make more efficient certain ways of coordinating the task of
producing goods. A model is proposed that compares alternative organisational forms and the
subsequent impact of ICT on these forms. This comparison considers the possible combination
of factors contributing to transaction costs and the effect of ICT on these factors. Utilising
empirical data, Ciborra (1993) suggests that the impact of ICT on transaction costs should be
appraised not only in quantitative terms but also by taking into account qualitative changes that
can be induced by ICT when it fosters a shift in the paradigm of the organisation that hosts it:
from hierarchies to the market, or from clans to hierarchies. If this occurs, Ciborra (1993)
suggests that the costs or benefits associated with such a shift must be taken into consideration
when assessing the effects of ICT on the economic system. Drawing upon the ideas underpinning
socio-technical analysis, Ciborra (1993) concludes that, appraising the costs and benefits of
information technology is more than accounting or auditing tangible and intangible
consequences of computer applications. Apart from the easiest cases, each time we carry out an
economic analysis of the actual or expected impacts of information technology, we need a point
of view and a conceptual framework on which to ground our evaluation. The point of view has
been spelled out by adopting a dichotomy: work tool vs organisational technology. The first
perspective allows us to look for the automating effects of information technology; the second
for the more subtle, but not less relevant, information effect.
Ciborra suggests that care should be exercised in evaluating the costs and benefits ICT can have
on transaction costs, because this assessment is not always as clear as it first appears. The
problem of assessing the information effects associated with the adoption of ICT, has not been
neglected by the author in his latest research. The information effect of ICT, produced by what
Zuboff (1988) defines as informating technologies, coupled with Ciborras depiction of
mediating technologies, were starting points for the development of his more recent research on
phenomenology and IS. Ciborra (forthcoming in 2008) posits that as informating technology,
ICT embodies the notion that all types of data models and representations embedded in
information systems provide a powerful set of representation of the processes of the firm that is
an important means of conveying, sharing and harnessing knowledge well beyond the
information stored in systems. ICTs not only represent tools that support information flows, but
they possess an enframing force that converts everything they encounter into a reserve stock of
resources to be harnessed and deployed for further development, (Ciborra and Hanseth, 1998).
ICTs are not tools but are a Gestell (ibid). The phenomenological argument underpinning the
vision of ICTs as enframing forces (Gestell) does not allow for claims in favour of the
managerial approaches to the study of ICT. These tend to examine the implementation of ICT as
a process that can be completely designed and controlled ex ante (Ciborra, 2000), and hence
easily measured ex post. This conclusion had already been reached when Ciborra made his claim
that the effect of ICT on transaction costs cannot be assessed ex ante by only examining the
results of technologies as automation tools. This paper explores these ideas, including a
discussion on the effects of ICT on transaction costs.
These various approaches addressing the impact of ICT on transaction costs underestimate the
effects of the interdependence among contributory factors. By considering these
interdependencies and their combined effects on transaction costs, an assessment can occur of
the real effects of ICT on the reduction of these costs.
TCT is grounded in the assumption that the relationship between human and environmental
factors is the reason transaction costs increase in the economic system. This is, however, not the
only reason why these costs exist. The interdependence of factors contributing to transaction
costs can contribute to their increase. Attempts to reduce transaction costs should not aim to
reduce the effect of a single factor, but the effects of the interdependencies between factors.
Transactions costs are not only the sum of the costs generated by the different factors, but are
influenced by the imbricate, interdependent relationship between them. The effect of ICT on
transaction costs must be studied by assessing this imbrication. Research in information systems
has mainly focused on the first approach. Illustrations of the second can be found in principal
agent theory (Grossman and Hart, 1983; Laffont and Martimort, 2002).
The following section extends Ciborras (1993) notions on TCT and ICT, discussing the effects
of ICT on transaction costs by not only considering the factors contributing to transaction costs,
but also their interdependencies. This will provide a richer theory in order to understand if ICT
is, ceteris paribus, always lowering transaction costs.
understand the effects of ICT on transaction costs, the impact of environmental complexity on
transactions needs to occur, due to bounded rationality. If economic agents have infinite
computational capabilities, then complexity and coordination costs should not affect the
transaction costs. At the same time, environmental uncertainty, information asymmetry and asset
specificity affect the transaction because of the risk derived through opportunistic behaviour. The
factors are deeply interdependent and when one increases or decreases, this variation requires
analysis in relation to the effects reflected in the interdependencies among all of the various
factors.
Adopting an analytical perspective congruent with the one proposed by Ciborra (1993), namely
that TCT is applicable in depicting the process of designing information technologies, an
exploration can occur on what conditions are required to successfully design ICT that reduce
transaction costs. The effect of ICT in reducing the impact of any of the factors contributing to
transaction cost has to occur in light of the overall consequences that a solution has on the set of
interdependencies that generate transaction costs. The impact of the adoption of ICT can be
negative as a result of unplanned consequences produced by these interdependencies. The nature
and direction of these effects cannot always be considered positive and unidirectional. As already
outlined (Cordella, 2001), ICT does not always positively impact transaction costs. The
interdependencies between human and environmental factors have to be made explicit in order to
assess if the impact of ICT will produce an overall positive or negative effect.
Following the depiction of the three major phases of transactions and the associated costs
proposed by Ciborra (1993), a more relevant description of the possible cross-effects of ICT can
occur. This facilitates better positioning while designing ICT that aims to reduce these costs. The
following presents an overview of the three phases of search costs, negotiation costs and
enforcement costs:
Search costs
ICT can lower search costs only if the increased amount of information and/or speed in its
exchange is balanced by an equal increase in its ability to manage, process, and evaluate that
information2 (Malone et al, 1987). Greater information results in lower uncertainty but greater
complexity. The effect of ICT on this phase of the transaction is positive only if the increased
information flow is equally balanced by an improvement in the ability to manage it. When this
does not occur the costs required to manage the increased information flow provided by ICT will
be greater than the advantage supplied by this new information. This will result in a negative
effect of ICT, leading to higher transaction costs. The positive effects of ICT on search costs
have often discussed in terms of disintermediation of the exchange processes. Traditionally,
intermediaries are considered a necessary transaction costs that has to be incurred in order to
reduce the search costs for sourcing and retrieving information. To complete an exchange, the
collection of information regarding available options is required, in addition to the location of the
goods and their characteristics. Malone et al. (1987) highlight that ICT can lower these costs by
making the retrieval process easier and cheaper while providing additional information on the
characteristics of the goods. Once acquired, ICT does for free what intermediaries do for a fee.
One of the most visible consequences of the diffusion of ICT in electronic markets is the
disintermediation of these markets (Malone et al., 1987; Benjamin and Wigand, 1995b; Chircu
and Kauffman, 1999).
2
The above conclusion is predicated on the assumption that ICT reduces the transaction costs of
electronic markets by making more information available at a lower cost while making the task
of processing the information easier and cheaper. The literature does not in general consider
cross-effects in cost benefit analyses, with different conclusions reached that discuss the case of
re-intermediation as it occurs in electronic markets (Bakos, 1991; Sarkar et al., 1995). Bailey and
Bakos (1997), studying thirteen different firms participating in electronic markets, find evidence
for the emerging roles of new intermediaries. This implies that disintermediation does not occur
and new transaction costs emerge as consequence of the digitalisation of the marketplace. The
most direct effect of this digitalisation on search costs is the problem of matching buyers and
sellers. Electronic marketplaces are bigger and more disperse, making it more difficult to retrieve
information about the available goods and their characteristics.
As a result of ICT, customers have access to a greater number of goods and considerable
information about these goods. Empirical work by Bailey and Bakos (1997) reveals that this can
lead to ambiguous results: on one hand lower search costs will reduce the importance of
intermediaries by allowing buyers to search directly for appropriate suppliers, while on the other
hand the overwhelming abundance of information offered by internet-based market infrastructure
my increase the need for intermediaries that can help to match customers and suppliers by
filtering information, (Bailey and Bakos, 1997). This scenario leads to greater transaction costs.
What Bailey and Bakos (1997) discover through empirical evidence is presented theoretically in
this paper. Namely, once ICT is implemented in order to lower transaction costs, the externalities
of the cross-effects of the interdependencies among the factors contributing to transaction costs
may be negative, resulting in the overall effect of the adoption of ICT being negative: under this
scenario, transaction costs increase rather than decrease.
Negotiation costs
These are the costs of executing the transaction and may include commission costs, the costs of
physically negotiating the terms of an exchange, the costs of formally drawing up contracts, and
others. Within this stage, better control over the transaction can occur through the use of ad hoc
ICT applications, in term of quality evaluation and service provisioning3 (Malone et al, 1987). A
more sophisticated inventory system can reduce the costs associated with the management of
transactions when goods require delivery according to specific contractual requirements. Ad hoc
systems can be designed to facilitate the evaluation of the services purchased. However, the
evaluation of this effect of ICT on the transaction cannot be fully assessed without considering
the costs associated with new coordination requirements that emerge as a consequence of the
adoption of the ICT application. Moreover, in changing the distribution of information among
economic actors, ICT can alter the information symmetry between them, increasing or
decreasing it, and offering new opportunities for opportunistic behaviour; what Williamson
(1975) defines as conditions of information impactedness. The effects of ICT on this phase of the
transaction have to be considered within the associated effects on the interdependent factors. A
positive balance is reached if all of the factors are counterbalanced and aligned. It cannot be
taken for granted that this always occur.
Bakos (1998) argues that electronic marketplaces, as physical markets, need to fix prices in order
to process transactions, manage inventories, guarantee quality, and to monitor the process of
transacting. These needs provide a fertile platform for the proliferation of new intermediaries that
3
facilitate these activities in global, bounded-less electronic marketplaces. Sarkar et al. (1995)
presents extensive analysis of the process that redesigns the organisation of intermediaries in
electronic marketplaces. Criticising the conclusion reached by Benjamin and Wigand (1995a) on
the effect of disintermediation in digital markets, they show that the number of intermediaries
and their role can increase, potentially leading to higher negotiation costs for the agents that
exchange in those markets. The assessment of the effects of the introduction of ICT on
transaction costs is once again complex and not unidirectional. Any analysis of this impact must
consider the cross-effects and externalities associated with attempts to overcome the limits of the
analyses that assume that a change in the exchange channel structure does not have effects on the
redistribution of the welfare among the agents that use this structure (Sen and King, 2003).
Enforcement costs
The costs in this phase encompasses those incurred by the buyers and sellers in order to ensure
that the virtual goods and services they transact, and the terms under which the transaction is
made, are translated into physical goods and services. This encompasses any negotiations that
address inadequate delivery, payment disputes, and any investment undertaken to ensure
unsatisfied buyers and sellers have their issues remedied through the enforcement of their initial
contract. As was evident in the previous two phases, ICT can provide a more efficient
environment for the enforcement of the exchange process by facilitating a match between
contractual agreements. ICTs can also assist in the process and subsequent monitoring of quality
certification. In this scenario, radio tags facilitate the monitoring of production and distribution,
making it easier to control the quality of goods. Moreover, ICT can make the information
exchange between the parties more expedient, efficient and extensive, increasing the links
between them and the resulting quality of the information flaw underpinning the exchange
process4 (Malone et al., 1987). In this scenario, a positive result occurs only if solutions exist to
manage the enriched information setting provided by ICT. The enhanced communication flow
with additional information increases the requirement for coordination. This scenario can alter
the information symmetry and the prospects and risks associated with opportunistic behaviour.
The effect of ICT can be positive if specific conditions are matched.
The globalisation of the digital economy increases the complexity and the uncertainty in the
enforcement of contractual agreements (Milosevic et al., 2003). From the transaction costs
perspective this more complex and uncertain environment also makes the definition of
contractual agreements more difficult and expensive. Angelov and Grefen (2003) depict that the
increased complexity and uncertainty faced by companies in digital markets are the reasons for
the increased number of contracts established by companies trading in these markets. In extreme
cases, these authors argue that a situation of contract overload has occurred. Daskalopulu and
Sergot (1997) provide evidence highlighting the increased complexity of the content of these
contracts, which supports the argument presented in this paper: higher costs will be incurred in
order to stipulate the use of contracts under these conditions. A greater number of contracts
coupled with increased complexity leads to higher transaction costs. An increased number of
contracts create the need for a company to invest in contract management systems. The increased
complexity of contractual agreements has therefore necessitated investment in technological
solutions that facilitate the establishment and execution of electronic contracts (Allen and
Widdison, 1996; Merz et al., 1998). Once again, the cross-effects of the adoption of ICT are
difficult to assess.
4
As argued by Ciborra (1993) the evaluation of the effects of ICT on the economic system must
take into consideration the socio-technical context within which the transactions occur.
Similarly, Lacity and Willcocks (1995) argue that transactions occur in dynamic environments
that change over time, rendering it difficult to take decisions that minimise transaction costs
without considering the context within which these transactions occurs.
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