Managerial Economics: Assignment
In this paper we shall focus first on the key characteristics of TCE (transactions cost economics) giving a theoretical introduction of its concepts. We will then analyze the vertical boundaries of Ross & C, the company I currently work for, and we will see how they evolved during the years. The discussion will concern the “to buy or to make” dilemma applied to the real case of the sales force. We will in fact show the transition from the sale force as outside agents (to buy) to the sale force as direct employee (to make) showing how the change of the environment can influence the modus operandi of a company.
Key characteristics of Transactions Costs Economics (TCE)
Transactions costs economics (TCE) theory, introduced by R. Coese in 1937 and later developed by Williamson, is concerned with understanding when it’s preferable to perform a process within the company (vertical integration) or on the contrary when it is convenient going to the market.
According to Williamson (1979) “the three critical dimensions for characterizing transactions are (1) uncertainty, (2) the frequency with which transactions recur, and (3) the degree to which durable transaction-specific investments are incurred.”
The consequent transaction costs are normally generated by researching potential suppliers, comparing the cost of the supplier and negotiating contracts. Further, costs will come from monitoring the performance and, in some cases, from legal costs due to contractual breaches.
The effectiveness of contracts hence depends on the completeness of the contract and the available body of contract law (Besanko – 2010)
In the real world most of the contracts are imperfect due to the impossibility to map every possible contingency. The main factors that prevent complete contracting are:
(1) bound rationality
(2) difficulties measuring performance
(3) asymmetric information,
Firstly, bound rationality considers the limited capacity of individuals of keeping under
Key characteristics of Transactions Costs Economics (TCE)
Transactions costs economics (TCE) theory, introduced by R. Coese in 1937 and later developed by Williamson, is concerned with understanding when it’s preferable to perform a process within the company (vertical integration) or on the contrary when it is convenient going to the market.
According to Williamson (1979) “the three critical dimensions for characterizing transactions are (1) uncertainty, (2) the frequency with which transactions recur, and (3) the degree to which durable transaction-specific investments are incurred.”
The consequent transaction costs are normally generated by researching potential suppliers, comparing the cost of the supplier and negotiating contracts. Further, costs will come from monitoring the performance and, in some cases, from legal costs due to contractual breaches.
The effectiveness of contracts hence depends on the completeness of the contract and the available body of contract law (Besanko – 2010)
In the real world most of the contracts are imperfect due to the impossibility to map every possible contingency. The main factors that prevent complete contracting are:
(1) bound rationality
(2) difficulties measuring performance
(3) asymmetric information,
Firstly, bound rationality considers the limited capacity of individuals of keeping under