Lecture 7 (Transaction cost economics - TCE)

Question 1

What is the main question of TCE

Answer 1

the decision to make something versus the decision to buy

Question 2

Assumptions of TCE

Answer 2

-Bounded rationality
-Opportunistic behavior

Question 3

Which three critical dimensions of a transaction determine the transaction costs:

Answer 3

Asset specificity (A.S.),
Uncertainty (U.), and Frequency (F.)

Question 4

Asset specificity, uncertainty and high transaction frequency leads to:

Answer 4

expensive market use, in-house production becoming more efficient

Question 5

advantages of the internal production are:

Answer 5

-Ability to negotiate on a long-term basis
- No surprises /more control about quality, availability
- Coordination by authority

Question 6

hold-up situation meaning

Answer 6

when one transactor takes advantage of another’s lack of comparably valued alternatives to insist on more favourable terms of trade

Question 7

When assets are specific in asset specificity?

Answer 7

Assets are specific when the supplier cannot redeploy them to an alternative use without a significant reduction in value

Question 8

What does high levels of asset specificity create?

Answer 8

hold-up situations

Question 9

Three types of specificity

Answer 9

1. Location specificity
2. Equipment specificity
3. Human capital specificity

Question 10

Location specificity meaning

Answer 10

buyers and sellers locate fixed assets in close proximity to minimize transport and inventory costs or to make process possible

Question 11

Equipment specificity meaning

Answer 11

One party or both parties have to use equipment that is dedicated to a particular (limited) usage

Question 12

Human capacity specificity meaning

Answer 12

Employees develop skills that are specialized to a particular
relationship or a given organization

Question 13

2 types of uncertainties

Answer 13

Technical uncertainty
Behavioral uncertainty

Question 14

Technical uncertainty meaning

Answer 14

Uncertainty due to the complexity of a good

Question 15

Behavioral uncertainty meaning

Answer 15

Uncertainty regarding the behavior of partners [Suppliers might stop supplying the goods.]

Question 16

Frequency meaning (as a dimension of transaction)

Answer 16

How often are the transactions made

Question 17

When is in-house production efficient

Answer 17

When there is high asset specificity, high uncertainty and high frequency

Question 18

Organizational forms

Answer 18

peer group (Relies on mutual adjustment)
simple hierarchy (relies on direct supervision)

Question 19

Multistage hierarchies:

Answer 19

U-form organization
M-form organization
H-form organization

Question 20

U-form organization meaning

Answer 20

Multiple levels of managers, good up to medium enterprise, or it suffers from cumulitive control loss

Question 21

M-form organization meaning

Answer 21

Multidivisional structure, operational divisions + general office. streamlines the cost of organizing.

Question 22

H-form organization meaning

Answer 22

Holding company with minimal level of interference

Question 23

Cumulative control loss meaning

Answer 23

loss of detailed and effective orders due to summarizations and bounded rationality