1. A Transaction Cost Approach to Make-or-Buy Decisions Walker & Weber (1984)
Anand RV
9/14/2017

2. What is this paper about?
Make or buy as a paradigmatic problem
Transaction costs framework
Key explanatory variables include
Supplier market competition
Technological and volume uncertainty
Buyer production experience
Comparative production costs
Mechanism
Complexity Communication

3. Research Question
Does uncertainty and differential production costs explain the make or buy decision?
What are the plausible mechanisms that can explain the make or buy decision?

4. Theory and hypotheses
Extant research up until then mainly concerned with vertical integration
This study also examined de-integration
Two key assumptions
Uncertainty is omnipresent
Has effect independent of asset specificity

5. Hypotheses

6. Results
Strong support for volume uncertainty and supplier production cost advantage
Moderate to poor support for supplier market competitiveness, supplier market competition, buyer experience in component production
No support for technological uncertainty, buyer experience vs. production cost advantage of supplier

7. Discussion/Issues Mixed support for Williamson's theory
The cognitive mechanisms remained a black box
Production costs more critical compared to transaction costs
Provides support for bounded rationality rather than a nullification of TCE
Managers construal thinking

8. Connecting themes Anderson & Schmittlein (1984)
Monteverde & Teece (1982)
Focus here is on experience post ex as compared to ex ante experience in Walker & Weber (1984)
Strengthens the predictions by Balakrishna & Wenerfelt (1984)
Technology uncertainty is a weak predictor for vertical integration
Anderson & Schmittlein (1984)
Asset specificity increases the likelihood of VI; more in line with TCE the Walker & Weber (1984)
Masten et al (1991)
Do not cite Balakrishna & Werenerfelt (1984) or Walker & Weber (1984)
Complexity maintains status quo but ultimately results in VI
Sets the stage for Poppo & Zenger (1998)
Move beyond the paradigmatic framework
The start position is key in this paper

9. Discussion questions
How can TCE be applied to make or buy decisions while considering the degree of product modularity? What are the plausible managerial challenges then to appreciate TCE?
What are the merits and demerits of binary vs. non-binary measures of the make or buy decision?
What are the suggestions to improve Walker & Weber’s (1984) analytical model?
Is TCE too academic?