BUREAUCRACY COSTS. In order to reduce market costs, a firm may choose to change to a
hierarchy (Williamson, 1985). However, the move from market governance does not indicate that
all transaction costs are eliminated; hierarchical governance incurs its own transaction costs. As
Jones and Hill (1988) state: “transaction costs do not simply disappear when firms choose
hierarchy over the market” (p. 163). Chandler (Scale, Scope, and Organizational Capabilities,
1988) defined transaction costs as “the cost of transfer of goods or services from one operating
unit to another” (p. 475). This definition implies that such costs may be incurred with either market
governance or hierarchical governance.