Investigating Search Costs and Coordination Costs in Electronic Markets: A Transaction Costs Economics Perspective

This paper examines how World Wide Web (WWW) usage for procurement purposes affects corporate buyers’ search costs and buying organizations’ coordination costs and how it ultimately affects the efficient boundaries of buying organizations. The analysis is based on a model that integrates Transaction Costs Economics (TCE) (Williamson 1975, 1985) and forces of electronic interconnections (Malone et al. 1987). Data collected from 110 corporate buyers from over 100 organizations doing business in a wide range of industries were used to test the validity of the proposed model. Findings show that WWW usage is associated with a reduction of buyers’ search costs, which can give buying organizations the flexibility to increase their base of suppliers when such an increase fits their interest. No clear relationship was found between WWW usage and the reduction of coordination costs buying organizations face to integrate their value chain activities with those of their suppliers. Findings show however that a WWW-based reduction in coordination costs can give buying organizations the flexibility to outsource certain activities when such a move fits their interest. The TCE framework was used to identify the transactions most likely affected by these changes in buying organizations’ boundaries.