Markets

Question 1

what are markets?

Answer 1

the market model assumes that we are individualistic self interest maximisers:

• consumers maximise utility
• firms maximise profits
• employees maximise pay

the market organises through Adam Smiths ‘invisible hand’ and a money base system of exchange

Question 2

why would you use markets? (1)

Answer 2

according to Alchian and Demsetz that’s all firms are anyway

the firm ‘has no power of fiat (order), no authority no disciplinary action any different in the slightest degree from ordinary market contracting

• organisations are just a collection of contracts between: owner and manager, supplier and buyer, employer and employee

Question 3

why do we use markets (2)?

Answer 3

prescriptive case for using markets

hierarchies are sometimes perceived as failing, specifically in terms of communication, change, innovation and effiecney

advocates of market forms of management point to:

• motivational advantages (competition)
• resource allocation advantages
• contestibality
• entrepreneurialism and innovation
• and effiency

Question 4

how do organisations use markets?

Answer 4

• all organisations rely on markets for supply (of resources) and demand (for their products or services)
• but some theorists suggest we should use markets much more actively
• 3 main ways of using
  = outsourcing
  = incentivising employees
  = internal markets

Question 5

what is out sourcing?

Answer 5

ll organisations procure from markets, but strategic outsourcing promises:

• cost savings
• quality improvement
• imported focus on core competence
• reduced risk
• reduced size

Question 6

what is incentivisation?

Answer 6

• pay for performance rather than attendance
• piece work, sales commission, assessed perfeormcae
• people more likely to be more motivated if paid not by the hour, hours not wasted

Question 7

what are internal markets?

Answer 7

• intrafirm compettiiton fostered by creating overlap between business units in a single organisation
• positive consequences include development of a greater number of strategic opinionsm shorter time to market coverage

Question 8

what are the problems with outsourcing?

Answer 8

• principal agent problems
  = info asymmetry
  = adverse selection
  = moral hazard
• transaction costs
  = specific asset (site, physical or human)
  = infrequency
  = uncertainty

Question 9

what are the problems with incentivisation?

Answer 9

• dysfuctions

- some people may not reposed to the higher pay

Question 10

what are the problems with internal markets?

Answer 10

- economic text books rehearse the classic problems of markets 
= monopoly 
= marketing and promotion costs 
= public goods 
= externalities 

• all of these problems can be experienced w within organisation
• need to consider the extent to which markets displace other forms of organisation
• rule following may be weaned by competitive enviro