When will AB create more value What are arguments to be skeptical of But AB

When will ab create more value what are arguments to

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When will A+B create more value? What are arguments to be skeptical of?
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But... A+B merged versus A and B standalone are not the only options Maybe some of the value can be created / captured through Joint ventures? Licensing agreements? Contracting for services? Economies of scale and scope seem to determine the optimal size and scope of firms but mergers are not the only way to exploit them 9
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10 Today’s question When should efficiencies be captured through ownership vs. contracts?
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11 The limits to contracting What makes contracting and ownership different? “If contracts are “complete”, there is no difference between contracting and ownership” – Coase The Coase Theorem: If perfect property rights, no transactions costs, then ownership has not baring on efficiency Of course, in the real world, contracts are not “complete”
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Incomplete contracts The starting point of modern contract theory is the observation that contracting is costly Costly to think ahead and foresee all contingencies Costly to negotiate over them Costly to write down what you’ve agreed on Difficult for courts to verify terms of contracts ex post The result is that real-world contracts only cover a small set of possible contingencies In the real world, ownership matters because it affects outcomes that are difficult to contract on explicitly 12
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Independence vs. Ownership 13
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Example: McDonalds McDonalds owns valuable assets e.g., Michigan & South Water store earns higher profits with assets than without Michigan & South Water store using it does not diminish value to Ohio & LaSalle (Rock & Roll) store Therefore efficient for both stores to use them 14
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Choice #1: McDonalds owns Michigan & South Water store Choice #2: Michigan & South Water store is a franchise 15 Example: McDonalds
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16 Example: McDonalds Consider the decisions that the manager of a McDonalds store has to make Some will be easy to contract on because there are foreseeable and verifiable What items to put on the menu What prices to charge Store hours How much McDonalds will charge for inputs What kind of sign they have to put out front
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17 Example: McDonalds Other actions are easy to verify but may be difficult to foresee at the time of contracting Growth of health consciousness leads McDonalds to add salads to the menu Rising beef prices mean McDonalds has to renegotiate the prices it charges franchisees McDonalds decides it’s important for its stores to be open later to serve younger demographic McDonalds wants to renovate stores to use more traditional signage and design elements
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18 Example: McDonalds Still other issues are easy to anticipate but difficult to verify and therefore hard to contract on How much effort the manager exerts to motivate employees How clean she keeps the store The quality of customer service provided Quality control of food product Distinction: “observable” versus “verifiable”.
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