Interorganizational Coordination In The Airline Industry, 1

Transaction cost theory is used to investigate the decision of horizontally linked firms to compete or cooperate in interorganizational exchange. It is argued that this decision depends on those dimensions of the environment that influence the level of transaction costs. Furthermore, it is argued that, when transaction costs become too high for voluntary cooperation to occur in the market, firms look for hierarchical solutions for managing interorganizational exchange. A qualitative analysis of the airline industry is presented as a case study that shows empirically the effect of changes in transaction costs on the level of coordination over time. The study indicates that the nature of hierarchy may take 2 forms. First, companies can merge and reduce transaction costs by fiat by extending the boundaries of the organization. Second, the companies may seek a hierarchical solution involving a third party that can equally economize on transaction costs and allow joint gains to be achieved.