The Moderating Influence of Firm Market Power on the Transaction Cost Economics Model: An Empirical Test in a Forward Channel Integration Context

Abstract

Transaction Cost Economics (TCE) has guided a variety of research on governance in the strategic management literature. An important question arises, however, as to whether the TCE framework is equally appropriate for all types of firms in all business settings. In this paper, we argue that TCE is not and suggest that firms with high market power may be able to lower transaction costs under high asset specificity and uncertainty in non-integrated distribution channels, avoiding the need to utilize highly integrated channels as a result. We test our hypotheses with data collected from 40 manufacturers of electronic and telecommunications products in 109 product-markets in the U.S. The results support our hypothesis that transaction cost factors are better at explaining forward channel integration for firms with low market power than for firms with high market power. Our results indicate that the basic TCE framework must be supplemented by the market power construct to adequately explain forward channel integration decisions.

Keywords: TCE, Firm Market Power, Channel Integration

JEL Classification: M21, L63