Institutional-economic perspective

Question 1

Who is the father of transaction-economy theory and what does he mean?

Answer 1

Father of the institutional-economic perspective.. States that price-mechanisms is not the optimal. There is a friction existing in the exchange of goods.
The market and the firm coordinate the exchange of firm.

Coase’s contribution was to focus on the overhead cost of searching, bargaining, and governing exchanges of value

Question 2

Which researchers on IEP?

Answer 2

Coase (1937) and Anderson E, Gatignon H. 1986 (a tranasaction cost analysis and propositions)

Question 3

What are sources to transaction cost?

Answer 3

1. uncertainty and complexity
2. asymmetric information
3. bounded rationality (limitations. Humans have limited memories and limited
   cognitive processing power to integrate all the information we have and perfectly workout its)
   consequences, as there are many options and competitor actions that are unpredictable.
4. opportunism (Self-interested)
5. small numbers
6. asset specificity (location specific, time specific and brand specific)

Question 4

What are the assumption of IEP?

Answer 4

1. The firm aims to decrease overal costs and improve long term efficiency. Oppotunistic and risk behavior harms economic efficiency.
2. The firm is risk-averse
3. Contries varies in terms of transaction costs,

Question 5

What kind of theory is the IEP?

Answer 5

Microeconomic theory: The choice between internalization and externalization, which reflects the entry mode choice.

Question 6

What drivers are there to the IEP?

Answer 6

Internal drivers and planned nature of decisions

Question 7

Unit of analysis in the IEP?

Answer 7

Cost of transactions

Question 8

What are transaction costs?

Answer 8

a transaction cost is a cost in making any economic trade when participating in a market.

Question 9

What kind of transaction costs do we have?

Answer 9

Ex-ante transaction costs
Stage 1: search and information costs – looking for locations for their shops
Stage 2: bargaining and contracting costs – With Toyota, Panasonic etc. Decrease control, but actually gets potential higher returns, since lacking these competences. (RBV-network-apprach). Tesla however make aquisitution in Grohmann engineering and Solarcity some years after.

Post transaction cost
Stage 3: is monitoring and enforcement costs
stage 4: Enforcement

Question 10

How to overcome transaction costs?

Answer 10

• Create a long-term contract to postpone having to deal with the circle of search, bargerning, contracting, monitoring and enforcement costs. However in reality, it is almost impossible.

Question 11

What does Aderson and Gatignon say about entry mode?

Answer 11

the most appropriate (i.e., most efficient) entry- mode is a function of the tradeoff between control and the cost of resource

1. First entry is the market with the lowest transaction cost – with the lowest uncertainty. Bounded rationality matters, so should be a market you know, to lower transaction cost.
2. Then geographical growth with an increasing degree of vertical integration.
   .

Question 12

Mention the four sources to transaction costs mentioned in Anderson and Gatignon, which lead to a degree of control and long-term efficiency

Answer 12

1.Transaction-specific assets: E.g. proprietary and tacit knowledge (know-how, experience).
 The firm must internalize to protect its valuable products and services. It is easier for other partners in the market to behave opportunistic and hereby damage the firms competitive advantages.
New product - internal equity
e.g. Tesla:
2. External uncertainty: volatity in the firm’s environment. Is combined with TSA^ to determine entry mode and degree of control -> long term efficiency.
 The higher degree of external uncertainty, the firm should sales through the market. If the product however is valuable, you still internalize to prevent opportunistic behavior – though with the risk of sunkcost.
3. Internal uncertainty: Larck of international experience, large cultural differences etc result in low degree of control. Also coordination cost will be higher than TC.
 Accordimg o the transaction theory, control should grow with experience. With little international experience the firm should not start making a international subsidiary.
.
4- Free-riding potential: Firms will take control to protect their brand name from degradation by free-riders (Davidson 1982) or to prevent the local operation from using the name in an inconsistent manner. (higher-control entry modes) as brand value increases

Question 13

Why do we have exposed transaction cost?

Answer 13

– goes back to bounded rationality, which is linked to imperfect contracts, which leads our contractor to behave opportunistically, which expose us to engage in post-transaction costs.