Strategic Management Journal Strat. Mgmt. J., 26: 541–553 (2005) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.465 RESOURCES AND TRANSACTION COSTS: HOW PROPERTY RIGHTS ECONOMICS FURTHERS THE RESOURCE-BASED VIEW KIRSTEN FOSS 1 * and NICOLAI J. FOSS 2 1 Copenhagen Business School, Frederiksberg, Denmark 2 Copenhagen Business School, Copenhagen, Denmark; and Norwegian School of Economics and Business Administration, Bergen, Norway Property rights economics furthers the resource-based view of strategic management in a number of ways. First, resources are conceptualized as being composed of multiple attributes for which property rights may be held. Second, a resource owner’s ability to create, appropriate, and sustain value from resources depends on the property rights that he or she holds and on the transaction costs of exchanging, defining, and protecting them. While transaction costs are a major source of value dissipation, reducing such dissipation may create value. Implications for the RBV analysis of sustained competitive advantage are derived. Copyright  2005 John Wiley & Sons, Ltd. INTRODUCTION According to Nobel Prize winner, Ronald Coase (1992: 716): [b]usinessmen in deciding on their ways of doing business and on what to produce have to take into account transaction costs ... In fact, a large part of what we think of as economic activity is designed to accomplish what high transaction costs would otherwise prevent. For example, consider the DeBeers diamond cartel and the practice they have adopted for orga- nizing sales. A customer informs DeBeers of her wishes for a specific number and quality of stones. DeBeers then offers the customer a packet of stones—a ‘sight’—that roughly corresponds to the customer’s wishes. The sight is offered on a ‘take-it-or-leave-us’ basis, where refusal to take the sight means that DeBeers refuses to deal with Keywords: transaction costs; property rights; resource value * Correspondence to: Kirsten Foss, Department of International Economics and Management, Copenhagen Business School, Porcelaenshaven 24, 2000 Frederiksberg, Denmark. E-mail: kf.int@cbs.dk the customer any more. The price is calculated based on the overall characteristics of the stones and no negotiation over the price is allowed. Does this strategy reflect raw market power on the part of a player that controls 80 percent of the world market for raw diamonds? Property rights economists have argued that it does not (Barzel, 1982; Kenney and Klein, 1983). Rather, this is a practice that maximizes created value in firm–customer relations by reducing the costs cus- tomers otherwise would have expended on sorting and negotiating, and it arguably exists for this rea- son (it would be superfluous in a zero transaction cost world). DeBeers sorts the product, but only in a coarse manner. The ‘take-it-or-leave-us’ practice and the non-negotiable price mean that negotiation costs are effectively eliminated. As only minimum resources (i.e., transaction costs) are spent on sort- ing and negotiating, DeBeers’ practice maximizes the total created value that the parties to the trans- action can split. Similar practices can be observed in many other industries, such as the prepackaging of fruit and vegetables in grocery stores, or block booking in the movie industry (Barzel, 1982, 1997; Kenney and Klein, 1983). Copyright  2005 John Wiley & Sons, Ltd. Received 26 February 2002 Final revision received 22 December 2004