manajerial economic and business strategy

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