Transaction cost theory examines whether firms should make something or buy it instead (Coase, 1937; Williamson, 1998). If a firm could obtain resources and produce a product all alone, then the firm would not need to make arrangements with other companies. However, this is usually not the case, and it is often advantageous for firms to enter into trading or other types of agreements with other companies.

The basic unit of analysis in transaction cost theory is the transaction. A transaction has occurred when a good or service is transferred across an organizational boundary. All transactions contain conflict, mutuality, and order (Williamson, 2002). Commons (1934) introduced a tripartite classification of transactions: bargaining, managing, and rationing. Bargaining transactions transfer ownership of wealth between equals by voluntary agreements. Managerial transactions create wealth by commands of legal superiors and authorities. Rationing transactions apportion the benefits and burdens of wealth creation processes through the actions of legal superiors and authorities.