Establishing a service channel: a transaction cost analysis of a channel contract between a cruise line and a tour operator

Purpose - The purpose of this paper is to highlight why service firms have difficulty in establishing channels and how transaction costs increase as a result. The paper shows how such difficulties may be overcome a mechanism that uses service capacity strategically.Design methodology approach - The paper uses a case study approach, and conducts a transaction cost analysis of the archival data of a cruise line along with the contract between the cruise line and a tour operator.Findings - The results show that service intermediaries aren't able to take inventory and are unable to demonstrate their commitment. Consequently, both parties would be unwilling to establish a contract. However, commitment can be achieved through the intermediary investing in relationship-specific assets that it could recover, subject to performance. Similarly, the firm could pledge its capacity for its investment in the specific assets. Such a mechanism aligns the interests of both.Practical implications - This case analyses an actual contract between two service firms and the issues surrounding it.Originality value - As contracts and actual company data of this nature are usually confidential, this paper is useful to provide insights into the process of deliberation and formation of service contracts.