Lecture 7 (Transaction cost economics - TCE) Flashcards
What is the main question of TCE
the decision to make something versus the decision to buy
Assumptions of TCE
-Bounded rationality
-Opportunistic behavior
Which three critical dimensions of a transaction determine the transaction costs:
Asset specificity (A.S.),
Uncertainty (U.), and Frequency (F.)
Asset specificity, uncertainty and high transaction frequency leads to:
expensive market use, in-house production becoming more efficient
advantages of the internal production are:
-Ability to negotiate on a long-term basis
- No surprises /more control about quality, availability
- Coordination by authority
hold-up situation meaning
when one transactor takes advantage of another’s lack of comparably valued alternatives to insist on more favourable terms of trade
When assets are specific in asset specificity?
Assets are specific when the supplier cannot redeploy them to an alternative use without a significant reduction in value
What does high levels of asset specificity create?
hold-up situations
Three types of specificity
- Location specificity
- Equipment specificity
- Human capital specificity
Location specificity meaning
buyers and sellers locate fixed assets in close proximity to minimize transport and inventory costs or to make process possible
Equipment specificity meaning
One party or both parties have to use equipment that is dedicated to a particular (limited) usage
Human capacity specificity meaning
Employees develop skills that are specialized to a particular
relationship or a given organization
2 types of uncertainties
Technical uncertainty
Behavioral uncertainty
Technical uncertainty meaning
Uncertainty due to the complexity of a good
Behavioral uncertainty meaning
Uncertainty regarding the behavior of partners [Suppliers might stop supplying the goods.]
Frequency meaning (as a dimension of transaction)
How often are the transactions made
When is in-house production efficient
When there is high asset specificity, high uncertainty and high frequency
Organizational forms
peer group (Relies on mutual adjustment)
simple hierarchy (relies on direct supervision)
Multistage hierarchies:
U-form organization
M-form organization
H-form organization
U-form organization meaning
Multiple levels of managers, good up to medium enterprise, or it suffers from cumulitive control loss
M-form organization meaning
Multidivisional structure, operational divisions + general office. streamlines the cost of organizing.
H-form organization meaning
Holding company with minimal level of interference
Cumulative control loss meaning
loss of detailed and effective orders due to summarizations and bounded rationality