slides11 - Inside the firm Professor Allen ECG 507 Fall...

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Unformatted text preview: Inside the firm Professor Allen ECG 507 Fall 2005 1. Overview Organizational boundaries Case discussion Production 2. Why are there firms? Markets are more efficient than planning Transactions costs to using the market Search and information Negotiation and contracting Policing and enforcement 3. Market transactions risky when Contracts costly to write Long-term relationships in dynamic settings Relationship-specific investments Ambiguous property rights Contracts, property rights not enforced One party has more information than another 4. Limitations on firm size Bureaucracies slow to respond to new information Top decision makers lack information Those with information lack incentives 5. Vertical chain of production STEPS Raw materials Transportation And Storage Parts Assembly Distribution SUPPORT Accounting Finance HR IS Marketing Planning R&D 6. Moving organizational boundaries Vertical integration Forward integration Backward integration Outsourcing 7. When to avoid the spot market Firm-specific assets -- hold-up problem Location Physical-asset Human-asset Dedicated assets Quality control Extensive coordination Guarantee supply 8. Issues with contracts Contracts are rarely complete Hard to anticipate all possible situations Cost of reaching agreement Cost of writing precise language Risk of opportunistic behavior rises with uncertainty 9. Contracting decisions Uncertainty Low High Asset Low Spot market Spot market specificity High Long-term Vertical contract integration 10. Other factors behind contract choice Economies of scale Market discipline Private information Monopoly power Conglomerates: economies of scope ...
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slides11 - Inside the firm Professor Allen ECG 507 Fall...

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