Case Assignment - contract since it is unclear on how to...

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Case Assignment The Transaction Cost Economics (TCE) was created by Oliver Williamson. The idea behind Transaction Cost Economics is that the market in general is always a more effective way to cut overall business costs. The reason why you look to the market instead of internalizing your costs is that the market is much more competitive. In general it is always best to go with the market, but Williamson has made an exception to this rule, if there is a market failure then the business must internalize the costs. Williamson mentions five conditions that contribute to market failures. The five conditions are as follows: Boundary Rationality- the idea behind this condition is that there is a vast amount of information that you can obtain about a market but ultimately it is impossible to know everything in detail. Knowing this, people may search for sufficient solutions rather than optimal solutions strictly because of the lack of extensive knowledge. Uncertainty- This is when there is a high level of uncertainty. It may be impossible to form a
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Unformatted text preview: contract since it is unclear on how to attain the final product. If there is no uncertainty then a contract can be formed. When the contract is finalized there is no questioning how the product was produced. Opportunism- This is when one party in a contract has an unequal share of power over the other. The party with more power can influence the other party in order to attain self fulfilment. Small Number- this is when there are few buyers or sellers in a market. You have exhausted all possibilities and have found few businesses to select from a market. Asset Specificity- This is when a business has a unique product. The business could be bound by the supplier since the supplier obtains special knowledge on how to manufacture the product. It would be difficult to change suppliers quickly since the new supplier would have to obtain the already existing knowledge or re-engineer the product....
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This note was uploaded on 02/09/2012 for the course ECON 440 taught by Professor Fenn during the Spring '11 term at American Internation College.

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Case Assignment - contract since it is unclear on how to...

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