Overview Of Economic Theories Flashcards
What is neoclassical theory?
Investigation of how efficient different types of markets (monopoly, duopoly,… ful competition) are in order to distribute welfare.
The firm is reduced to a production equation that optimise the balance between input factors, amount of supply and price level.
The firm’s only goal is to maximise profit.
Actors have full information and calculate utility
The theory can be tested through the structure of conduct performance paradigm (SCP paradigm)
Michael Porter has turned the neoclassical theory (SCP Paradigm) upside down with his Fice Forces model
Optimising welfare distribution through full competition is replaced by optimising profit for the company by creating a monopoly-like situation.
The theory can be criticised by being static, historic, political and non-social and it does not take transaction cost and learning into account.
What is structure of conduct performance?
Conduct = f(Structure) Performance = f(Structure, Conduct) = Q(Structure)
The industrial structure determines the performance (profit) of the industry
1) Basic conditions: supply side
Raw materials, technology, unionization, product durability, business attitude, public policy
2) Basic conditions: demand
Price elasticity, substitutes, rate of growth, season condition, purchase method, marketing type
3) Market structure
Number of buyers & sellers, product differentiation, vertical integration, cost structures, entry barriers, conglomerateness
4) Conduct
Price behaviour, research and innovation, plant investment, product strategy & advertising, legal tactics
5) Performance
Production and allocative efficiency, progress, full employment, equity
What is managerialism?
Separation between ownership/managers –> own incentives.
Firms do not only have profit maximisation as their goal, growth is often also a goal.
The separation between ownership and professional leaders create an incentive towards growth at the expense of return
Empirical studies inform us that companies in practice apply mark-up pricing instead of calculating the optimum price
Managerialism still holds on to full rationality of the actors.
Focus on the internal part of the organsation and on managers as decision makers.
What is behavioural theory?
Organsations do not maximise, they satisfy when they take decisions
The organsation can be viewed as a stakeholder balance or as a loosely coupled system with a dominant coalition of stakeholders.
The idea of standard operational procudures and organsational learning (adoption) is developed within behavioural theory.
The basic assumption is that human beings act bounded rational
Focusing on how we take decisons within an organsational context
This theory provides us with insight about how things happen within organsations.
Especially the logical incremental process and strategy development as a political process build on behavioural theory.
What is evolutionary theory?
Evolutionary theory explains how industries and types of organsations develop over time.
Changes are explained through the mechanism of transmission, variation and selection as a long temr accumulative irreversible process:
1) Transmission = same over time, routines, both conscious and unconscious = efficient way to handle
2) Variation: new technology
3) Selection: markets selects the best
Organsations are made-up by routines that are developed and selected and transmitted both conscious and unconscious
Routines are an efficient way for human beings to handle decisions.
It is not necessarily the best, but the most efficient routines, that are selected.
Within this theory, management has a very passive role to play.
The theory has influenced the idea of strategy development as resource allocation.
What is resource based theory?
The resource based view tells us why some organsations perform better than others.
Firms are perceived as a bundle of resources and competences.
Resources and competences should be acquired cheaper, developed faster and utillised more efficient than by competitors.
Competences are developed over time through repeated activities.
The basic assumption is that human beings act bounded rational, that they optimise through creating routines, and that routines and knowledge is accumulated over time through an evolutionary process.
Implications for managers are that they ought to think about how to get fast and cheap access to resources and in what activities to engage in order to develop certian competences.
What is principal/agent theory?
A theory on how a principal through contracting can motivate an agent.
The agents have more information and other interest than the principal, and the agent acts potentially opportunistic
It is the taks of the principal to formulate a contract that contains the right incentives in order to motivate and manage the agent’s behavour.
The problem of adverse selection and moral hazard.
The basic assumption is that agents have full rationality = optimise
The theory is criticsed for assumint that agents act potentially opportunistic
Within strategic management, we draw on this theory when we try to regulate managers, employees, customers and supplier’s bahviour.
What is transaction cost theory?
The unit of analysis is transactions, which can be goverened either through the market, contracting or through organsations
The cost of transaction are contat, contract and control
The market adapts quickly to simple changes whereas firms are good to adapt to more complex changes.
The basic assumption is that agents act bounded rational and potentially opportunistic
We organise our transactions in an efficient why through markets, contracting or hierarchies depending on the transactions frequency and asset specificity.
The more seldom we buy and the more standardised the asset, the more efficient is the market as the governance structure.
The more often we buy and the more specialised the asset is, the more efficient the organsation as the governance structure.
What can the transaction cost theory help us with?
The theory can guide us on when to buy a customer or a supplier = vertical integration
The theory can also give us some guidelines in when to insource or outsource an activity.
The theory can help us draw the boarders between the firm and the environment, and is therefore central within strategic management.
The theory can be criticised for the fact that people rarely act opportunistic
What is neo-institutional theory?
Explain why it is efficient to have institutions within markets and how they are built (a compaony, property rights and patents)
We create institutions in order to build security and give up some of our freedom to act in this process
We create property rights through building a national state with police, military and a court system in order to create markets and companies that trade on these markets.
We have firms in order to solve the problem of collaboration between actors and solve how they should be paid
Since we cannot measure the performance of each stakeholder we create a contract with each of them and the residual income is left for the owner (the firm as a nexus of contracts)
Build on agency theory and assumes that human beings act bounded rational and potential opportunistic
What do the different economic theories say? Behaviourism?
Explains strategy development processes.
Strategy is about managing the balance of stakeholders, optimising the decision-making capacity and make sure of learning and adoption
What do the different economic theories say? Managerialism
Explains the difference between goals of the owners and managers.
Strategy balance between return, risk and growth
What do the different economic theories say? Principal/agent theory
Explains how we create incentives to pursure specific goals
Strategy is about organsing the formal governement structure
What do the different economic theories say? Neo-classical theory and SCP paradigm
Explain competitve forms and price formation
Strategy is about positioning and creating a monopoly like situation within the industry
What is the link between neoclassical theory and strategy models?
Five Forces model
Boston Consulting Group model
Competitive strategies
