manajerial economic and business strategy

Topics: Management, Vertical integration, Contract Pages: 9 (947 words) Published: December 13, 2013
Managerial Economics &
Business Strategy
Chapter 6
The Organization of the Firm

Michael R. Baye, Managerial Economics and Business Strategy, 5e. Hakan TASCI
McGraw-Hill/Irwin Elon University

rights reserved.
Departmentby © 2006 by The McGraw-Hill Companies, All rights reserved. Copyright ©Copyright The McGraw-Hill Companies, Inc.Inc. All Spring 2007 2006 of Economics

Overview
I. Methods of Procuring Inputs
Spot Exchange
Contracts
Vertical Integration

II. Transaction Costs
Specialized Investments

III. Optimal Procurement Input
IV. Principal-Agent Problem
Owners-Managers
Managers-Workers
Michael R. Baye, Managerial Economics and Business Strategy, 5e. Hakan TASCI
Elon University

Copyright Economics
rights reserved.
Department of© 2006 by The McGraw-Hill Companies, Inc. All Spring 2007

Manager’s Role
• Procure inputs in the least
cost manner, like point B.
• Provide incentives for
workers to put forth effort.
• Failure to accomplish this
results in a point like A.
• Achieving points like B
managers must
Use all inputs efficiently.
Acquire inputs by the least
costly method.

Michael R. Baye, Managerial Economics and Business Strategy, 5e. Hakan TASCI
Elon University

Costs

C(Q)
A

$100
80

B

Q
0

10

Copyright Economics
rights reserved.
Department of© 2006 by The McGraw-Hill Companies, Inc. All Spring 2007

Methods of Procuring Inputs
• Spot Exchange
When the buyer and seller of an input meet, exchange, and then go their separate ways. No official contracts, no long term relation

• Contracts
A legal document that creates an extended relationship between a buyer and a seller.
Ex: Car Rental Companies and Auto maintenance

• Vertical Integration
When a firm shuns other suppliers and chooses to produce an input internally.
Set up your own service in the rental company. No specialization.

Michael R. Baye, Managerial Economics and Business Strategy, 5e. Hakan TASCI
Elon University

Copyright Economics
rights reserved.
Department of© 2006 by The McGraw-Hill Companies, Inc. All Spring 2007

Key Features
• Spot Exchange
Specialization, avoids contracting costs, avoids costs of
vertical integration.
Possible “hold-up problem.”

• Contracting
Specialization, reduces opportunism, avoids skimping
on specialized investments.
Costly in complex environments.

• Vertical Integration
Reduces opportunism, avoids contracting costs.
Lost specialization and may increase organizational
costs.
Michael R. Baye, Managerial Economics and Business Strategy, 5e. Hakan TASCI
Elon University

Copyright Economics
rights reserved.
Department of© 2006 by The McGraw-Hill Companies, Inc. All Spring 2007

Transaction Costs
• Costs of acquiring an input over and above
the amount paid to the input supplier.
• Includes:
Search costs.
Negotiation costs.
Other required investments or expenditures.

• Some transactions are general in nature
while others are specific to a trading
relationship.
Michael R. Baye, Managerial Economics and Business Strategy, 5e. Hakan TASCI
Elon University

Copyright Economics
rights reserved.
Department of© 2006 by The McGraw-Hill Companies, Inc. All Spring 2007

Specialized Investments
• Investments made to allow two parties to exchange
but has little or no value outside of the exchange
relationship.
• Types of specialized investments:
Site specificity.
Physical-asset specificity.
Dedicated assets.
Human capital.

• Lead to higher transaction costs
Costly bargaining.
Underinvestment.
Opportunism and the hold-up problem.
Michael R. Baye, Managerial Economics and Business Strategy, 5e. Hakan TASCI
Elon University

Copyright Economics
rights reserved.
Department of© 2006 by The McGraw-Hill Companies, Inc. All Spring 2007

Specialized Investments
and Contract Length
$
MC

MB1
Due to greater need for
specialized investments
MB0
Longer Contract
0
Michael R. Baye, Managerial...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • business economics Essay
  • Essay on business strategy
  • Business economics Research Paper
  • business economics Essay
  • Business: Economics and Pricing Strategy Essay
  • Essay on Strategy at Business Level
  • Patagonia s Business Strategy Essay
  • Essay on Business Policy and Strategy

Become a StudyMode Member

Sign Up - It's Free