Part 1 Theoretical foundations - theories of the firm (2/4) - transaction cost theories of the firm

Question 1

What does the chapter on transaction cost theories of the firm focus on on a first approach?

Answer 1

It focuses on the nature of market transaction

Question 2

What are the 2 types of rights regarding a contract and how are they developed?

Answer 2

1\ Specific rights in the contract

2\ Residual rights, next to the contract

Question 3

What are the 2 main characteristics for a firm in order to survive in the long run?

Answer 3

1\ Technically efficient

2\ Economically efficient

Question 4

What is the starting point in the Coasian devveloment?

Answer 4

Many decisions are taken unconsciously through the operation of the price mechanism

Question 5

When are transaction costs incurred?

Answer 5

When using markets to allocate resources

Question 6

What are transaction costs?

Answer 6

1\ Gathering information about relative prices
2\ Negotiating contracts
3\ Artificially created by governments

Question 7

When does a firm expand in the Coasian firm model?

Answer 7

When additional transactions are removed from the sphere of the market and are instead dictated within the boundaries of the firm

Question 8

What does the Williamson’s approach reflect?

Answer 8

Costs arise from difficulties in monitoring and enforcing compliance and punishing non-compliance

Question 9

What types of unforseen consequences could arise with contracts that have already been agreed?

Answer 9

Renegotiation or switching costs if alternatives partners or production technologies are discovered

Question 10

What is a big issue in contracts?

Answer 10

Asset specific to that contract

Question 11

What is the quasi-rent?

Answer 11

The difference between the asset’s value in its present use and its value in its next best use

Question 12

What is a common remedy to transaction costs?

Answer 12

Internalization of transactions

Question 13

How are subdivided key activities in a unitary or U-form organizational structure?

Answer 13

Into functional areas. This form is useful when the firm produces a single product.
Usually small to medium size firms

Question 14

What does become more difficult as transaction costs increase?

Answer 14

Coordination of resource allocation and transmission of information

Question 15

How does a multidivisional organizational strucure work?

Answer 15

It is divided into a number of quasi-independent operating divisions. Each division is a quasi firm

Question 16

How can products be organized in the M-form structure?

Answer 16

1\ geographically

2\ by product type

Question 17

What type of role does the head office have?

Answer 17

Longer-term strategic direction, supervisory role

Question 18

What does this form allow?

Answer 18

Adress problems of coordination across large distances and the desire to reduce agency costs by closely linking individual pay to performance. Ex: retailing

Question 19

What are the 3 most significant characteristics of Apple’s organizational structure?

Answer 19

1\ Spoke-and-wheel hierarchy
2\ Function-based grouping
3\ Product-based grouping

Question 20

What are the advantages and disadvantages of such a structure (Apple)?

Answer 20

Strong control but limited flexibility

Question 21

How does a holding structure work?

Answer 21

Significant ownership stake for multi-national companies

Question 22

In a nutshell, what does williamson’s theory propose?

Answer 22

A governance structure

Question 23

What are the 3 essential characteristics of transactions according to Williamson?

Answer 23

1\ Degree of asset specificity
2\ Potential disturbances for transaction
3\ Frequency with which the transaction recurs

Question 24

What do transactions contain?

Answer 24

1\ Elements of conflict and disorder

2\ Offer the potential for mutual gains by both parties

Question 25

What is the goal sought by governance?

Answer 25

Increasing order and creating conditions required for mutual gains to be realized

Question 26

What are the differences between an organization or hierarchy and the market?

Answer 26

In a hierarchy:
1\ incentives tend to be lower
2\ controls are more copious
3\ conflicts are resolved by diktat