Chapter 2 Flashcards
What is NIE?
New Institutional Economics was introduced by Oliver Williamson to explain cooperation and its effect.
NIE according to Klein
2 main goals:
-explain why institutions are established
-recommend design for these institutions
3 concepts:
-transaction cost theory: costs of coordinating economic transactions
(helps to decide best way to organize business activities by considering all costs involved in market)
-property rights theory: allocation of property rights & economic implications
-principal-agent theory: deals with conflicts during delegation due asymmetrical info & different interests.
2 assumptions:
-utility maximization: individuals act in self-interest
-limited rationality: people have limited ability to process info.
What is Game Theory and what is its key takeaway?
Game Theory models social interactions as game situations to analyze strategic decision-making situations. It is similar to NIE because it depicts the theory of individual rationality (everyone acts on their own self-interest), considering the possible action of others.
Key takeaway:
make strategic decisions: decide long/short-term cooperation.
think about consequences of rationality trap: less efficiency in supply chain -> higher costs and delays
What is Network Theory?
Network theory describes the relationship between companies, suppliers and customers.
According to Harland, network is a type of relationship connecting a group of people, objects, or events
Chang et al, define the supply chain network as a complicated network model with the relationships, depending on the network members.
3 parts of network:
NEA
Nodes, Edges, Attributes
4 types of networks: DIGS
Data Network, Institutional network, Goods Network, Social Network
What is the Real Option Approach?
ROA helps businesses choose the right investment approach for their development.
Why? Because, Data to back up decisions is very uncertain and different approaches vary in flexibility, reversibility and contributions.
Real Options Approach uses mathematical models to makes assessments to for financial decisions. It provides businesses the option, but not the obligation to purchase assets.
It is beneficial for alternative investment projects especially for cases with high uncertainty and irreversibility. E.g. in the Pharma industry R&D, due technical and regulatory uncertainty, decisions are hard to reverse in case of failures. They collaborate with smaller companies or the government, to share those risks .
Best case scenario : it secures marketing rights.
Worst case scenario: it has to pay for the one-time licensing cost.
For supply chain management: investing in flexible and reversible options is crucial when dealing with uncertain market conditions.
The Real Options Approach can guide decisions on whether to invest, acquire or collaborate
What are the differences and similarities between the concepts?
Similarities:
all approaches assume rational behavior:
-individual rationality: NIE, Game theory, ROA
-strategic rationality: Network theory, RDA
each examines interactions between entitities
all address uncertainty and role of info
Differences:
NIE: focuses on institutions, transaction costs
Game theory: focuses on strategic interactions
Network theory: focuses on relationships within networks
ROA: focuses on investment decisions during uncertainty
RDA: focuses on external resource dependency and power dynamics
What factors key factors in Transaction Theory?
CUFST
Costs: PTMAN
-process costs: settlement
-transaction cost: initiation
-monitoring costs: control
-additional costs: adjustment
-negotiation costs: agreement
Uncertainty: difficulty predicting costs ->high ex ante (forecast costs) -> adjustment costs
Frequency: frequency of transaction costs
Specificity: PHLO : high: no further reason, low: other reason
-physical capital specificity
-human capital specificity
-location specificity
-order related specificity
Transaction Atmosphere: everything else, including market-hierarchy paradigm
When to use market-hierarchy-hybrid?
Market: LOW specificity, complexity, uncertainty
(price mechanisms + low transaction costs)
Hierarchy: HIGH specificity, control
(!!high initial (control) costs, internal company)
Hybrid: medium specificity, complexity, uncertainty
(mixture of both approaches)
What is Principal-Agent theory
addresses a delegation problem, where principal hires agent to perform tasks, due to asymmetrical info and different interests
Problems arise due to 3 factors: CIA
hidden Characteristics, Intentions, Action
Pros: provides good orientation for contracts to avoid opportunistic behavior.
Cons: not full explanation of cooperation, because ignores concept of trust -> may escalate mistrust.
Hidden Characteristics/ Adverse Selection: aptitude, qualification, talent withheld by agent -> can lead to suboptimal selection of agent, characteristics are only apparent after contact signing.
Hidden Intentions/ Hold-up problem: good will, fairness are unknown -> agent may change behavior then exploit loopholes after contract signing -> forcing principal to renegotiate under worse terms.
How to avoid/minimize:
Signaling: agent sends signal by increasing transparency, building trust and good reputation to reduce information asymmetry of principal.
Agency costs: costs incurred to resolve conflicts between principal agent
Monitoring costs: costs shouldered by principal to oversee agent, including performance evaluation and contract re-negotiation.
Bonding costs: costs shouldered by principal for guarantees & compensation by breaches
Opportunity costs: losses due to difference between optimal and actual outcome
What is rationality trap?
Rationality trap occurs when individual rational behavior leads to a collectively inefficient outcome = acting in own self-interest leads to worse outcome for the group as whole.
What happens in multi-player match situation? And what are the rules
It shows us that long-term cooperation be beneficial to individuals and lead to long-term gains. Individuals change their behavior, because there is a chance to punish non-cooperation.
Rules of Robert Axelrod:
Be nice and provocable
Don’t be envious and too clever.
Describe the 4 types of network
Four networks: DIGS
Data Network, Institutional network, Goods Network, Social Network
Data Network:
Availability of info is important for decision-making, transparency is a must! (To avoid bullwhip effect)
Nodes=people, machines
Edges=communication channels
Institutional Network: game theory says always defect, you should see the network as a whole. Quality depends on mutual relationship
Nodes=partners
Edges=contracts & equity
Goods Network: describes process in value added network from raw materials to end customer.
Nodes= value creation activity/company
Edges= flow of goods
Social Network: cooperation activities/good relationships are important
Nodes= employees
Edges= relationships/ interactions
What Cooperative production?
cross company availability of information relevant to decision making.
What is the Resource Dependence Approach?
RDA Resource Dependence Approach
Companies are viewed as systems of resource supply processes and resource acceptance processes. Resources can mean social, intellectual and materiaI (e.g. competency, capital. Their ability to perform depends on the resources. If a company has insufficient resources, it needs to cooperate. Basis for cooperation is dependency and insecurity.
Dependency: the measured through the extent to which a company is controlled. If another company has important/needed resource then a company is dependent to that company or that company can gain control over it.
Insecurity: is the existential threat faced by a company if it lacks access, or resources become scarce or unavailable. Factors for insecurity include:
-scarcity
-resources concentration
-accessibility.
Reason for cooperation: to share resources, to avoid alternative options (acquisition, merger), to reduce uncertainty, to remain flexible.
For SCM: Understanding and managing dependency is important to avoid losing control over resources.
