Market Failure Hypothesis


This term is used by Williamson to indicate those situations where the "market fails" to provide a more efficient, less expensive environment for transactions than within the hierarchy of an organization (Williamson, 1975). Williamson's "Market Failures" framework forms the basis for transaction-cost theory.

Specifically, in instances of bounded rationality, opportunism, and player scarcity, the transaction uncertainties are too high to be effectively managed in the market and are better controlled within organizational hierarchies. This reasoning can be used to explain the development of functional departments and vertically integrated corporations in US industry.