Part 1 Theoretical foundations - theories of the firm (2/4) - transaction cost theories of the firm Flashcards
What does the chapter on transaction cost theories of the firm focus on on a first approach?
It focuses on the nature of market transaction
What are the 2 types of rights regarding a contract and how are they developed?
1\ Specific rights in the contract
2\ Residual rights, next to the contract
What are the 2 main characteristics for a firm in order to survive in the long run?
1\ Technically efficient
2\ Economically efficient
What is the starting point in the Coasian devveloment?
Many decisions are taken unconsciously through the operation of the price mechanism
When are transaction costs incurred?
When using markets to allocate resources
What are transaction costs?
1\ Gathering information about relative prices
2\ Negotiating contracts
3\ Artificially created by governments
When does a firm expand in the Coasian firm model?
When additional transactions are removed from the sphere of the market and are instead dictated within the boundaries of the firm
What does the Williamson’s approach reflect?
Costs arise from difficulties in monitoring and enforcing compliance and punishing non-compliance
What types of unforseen consequences could arise with contracts that have already been agreed?
Renegotiation or switching costs if alternatives partners or production technologies are discovered
What is a big issue in contracts?
Asset specific to that contract
What is the quasi-rent?
The difference between the asset’s value in its present use and its value in its next best use
What is a common remedy to transaction costs?
Internalization of transactions
How are subdivided key activities in a unitary or U-form organizational structure?
Into functional areas. This form is useful when the firm produces a single product.
Usually small to medium size firms
What does become more difficult as transaction costs increase?
Coordination of resource allocation and transmission of information
How does a multidivisional organizational strucure work?
It is divided into a number of quasi-independent operating divisions. Each division is a quasi firm
How can products be organized in the M-form structure?
1\ geographically
2\ by product type
What type of role does the head office have?
Longer-term strategic direction, supervisory role
What does this form allow?
Adress problems of coordination across large distances and the desire to reduce agency costs by closely linking individual pay to performance. Ex: retailing
What are the 3 most significant characteristics of Apple’s organizational structure?
1\ Spoke-and-wheel hierarchy
2\ Function-based grouping
3\ Product-based grouping
What are the advantages and disadvantages of such a structure (Apple)?
Strong control but limited flexibility
How does a holding structure work?
Significant ownership stake for multi-national companies
In a nutshell, what does williamson’s theory propose?
A governance structure
What are the 3 essential characteristics of transactions according to Williamson?
1\ Degree of asset specificity
2\ Potential disturbances for transaction
3\ Frequency with which the transaction recurs
What do transactions contain?
1\ Elements of conflict and disorder
2\ Offer the potential for mutual gains by both parties
What is the goal sought by governance?
Increasing order and creating conditions required for mutual gains to be realized
What are the differences between an organization or hierarchy and the market?
In a hierarchy:
1\ incentives tend to be lower
2\ controls are more copious
3\ conflicts are resolved by diktat
