Question

1. Major car manufacturers tend to have long-term strategic relationships with core sub-assembly suppliers (e.g. drive train – engine, interior furniture, electrical systems, etc.). Using Williamson’s Transaction Cost Economics theory, identify two reasons why each party (the manufacturer and the supplier) would wish to have a privileged relationship rather than rely on the marketplace (pure price-based tendering) for their buying and selling.

Answer 1

There are certain Transaction costs occur when the firm dealing with another external party. Those are:

Search and information costs involved in finding the supplier,

Bargaining and decision costs when purchases the component, and

Policing and enforcement costs in monitoring quality.

Thus the firm will opt for a strategic relationship with the supplier to avoid the transaction cost.