Integrating Transaction Costs Theory and Real Options Theory

This paper develops an integration of transactions costs theory and real options theory that leads to a more complete representation of the problem of economic organizing. By recognizing the opportunity costs associated with internalization of specific‐use assets when flexible assets are also available, the integrated theoretical framework provides better insights into optimal strategies for configuring value chains under supply‐side and demand‐side uncertainty. This expanded model of economic organizing suggests four optimal strategies for configuring value chains and predicts four prevailing forms of economic organization under varying combinations of contracting (supply‐side) and market (demand‐side) uncertainty.