International Journal of Industrial Organization 3 (1985) 365-378. North-Holland
ASSET SPECIFICITY AND ECONO_MIC ORGANIZATION*
Michael H. RIORDAN
Stanford University, Stanford, CA 94305, USA
Oliver E. WILLIAMSON
Yale U~dversity, New Haven, CT 06520, USA
Final t,ersion received May 1985
This paper examines the optimization problem of firm and market organization in which both
production cost and transaction cost differences are expressed as a function of asset specificity.
In general, markets enjoy advantages by aggregating the demands of many buyers, thereby
realinng economies of scale or scope. Such production cost savings need to be assessed in
relation to the transaction cost advantages that internal organization sometimes enjoys over
markets in adapting to changed circumstances. As it turns out, both production cost economies
and the transaction cost differences between firm and market organization vary systematically
with the characteristics of the investments. This paper employs a unified framework to assess the
choice of organization form. The condition of asset specificity is featured.