Transaction cost theory is used to examine 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 affect 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 seek hierarchical or third party solutions for managing interorganizational exchange. A qualitative analysis of the airline industry is presented as a case study that demonstrates empirically the effect of changes in transaction costs on the level of coordination over time.
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