Markets versus hierarchies Before early 18th century, most transactions between merchants and artisans (producers of goods like cotton and other hand made products) were done at the market place and guided by price information, and supply and demand. Early 1800 merchants started to employ artisans and, by doing so, they replaced market based contracts by labour contracts.

a. What were the main reasons for merchants to bring their contractual market relations into a hierarchical organisation?

b. Are the reasons mentioned under the previous question similar to what economic theory used to call ‘market failures'? Explain your answer.

c. If market based transactional relations are replaced by hierarchical coordination based on labour contracts, could this lead to a more effective coordination? Motivate your answer.

d. Ronald Coase and Oliver Williams have developed ‘transaction cost theory’ to analysed the difference between market coordination and coordination within organisational hierarchies.

Use transaction cost theoretical insights to explain the developments around 1800.