...The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1991 Ronald H. Coase Ronald Harry Coase (/ˈkoʊz/; 29 December 1910 – 2 September 2013) was a British economist and author. He was the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took courses with Arnold Plant. He received the Nobel Prize in Economics in 1991. Coase, who believed economists should study real markets, not theoretical ones, established the case for the corporation as a means to pay the costs of operating a marketplace. Coase is best known for two articles in particular: "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the nature and limits of firms, and "The Problem of Social Cost" (1960), which suggests that well-defined property rights could overcome the problems of externalities (see Coase theorem). Coase is also often referred to as the "father" of reform in the policy for allocation of the electromagnetic spectrum, based on his article "The Federal Communications Commission" (1959), where he criticises spectrum licensing, suggesting property rights as a more efficient method of allocating spectrum to users. Additionally, Coase's transaction costs approach is currently influential in modern organizational economics, where it was reintroduced by Oliver E. Williamson...
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...The Coase Theorem In “The Problem of Social Cost,” Ronald Coase introduced a different way of thinking about externalities, private property rights and government intervention. The student will briefly discuss how the Coase Theorem, as it would later become known, provides an alternative to government regulation and provision of services and the importance of private property in his theorem. In his book The Economics of Welfare, Arthur C. Pigou, a British economist, asserted that the existence of externalities, which are benefits conferred or costs imposed on others that are not taken into account by the person taking the action (innocent bystander?), is sufficient justification for government intervention. He advocated subsidies for activities that created positive externalities and, when negative externalities existed, he advocated a tax on such activities to discourage them. (The Concise, n.d.). He asserted that when negative externalities are present, which indicated a divergence between private cost and social cost, the government had a role to tax and/or regulate activities that caused the externality to align the private cost with the social cost (Djerdingen, 2003, p. 2). He advocated that government regulation can enhance efficiency because it can correct imperfections, called “market failures” (McTeer, n.d.). In contrast, Ronald Coase challenged the idea that the government had a role in taking action targeted at the person or persons who “caused”...
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...Abstract In 1959, Ronald Coase introduced what is now known as the Coase Theorem, which suggests that absent transaction costs, any initial property rights agreement leads to an economically efficient outcome. Straying from previous models supported by most economists, this position was initially met with skepticism. Discussion Prior to 1959, the standard economic understanding held that government regulation enhances efficiency by correcting for claimed imperfections. This thinking was in keeping with A. C. Pigou’s contention that was developed in 1920. Pigou called claimed imperfections, “market failures”. In 1959, Ronald Coase authored an article for the University of Chicago’s Journal of Law and Economics entitled, “The Federal Communications Commission”. In this article, Coase suggested that in the absence of transaction costs, any initial property rights arrangement leads to an economically efficient outcome (McTeer 2003). In Coase’s discussion, he changes the way torts are viewed. In Pigou’s model, one party does harm to another; therefore, government regulation is necessary to ensure that the party filing the claim of harm is no longer harmed. Coase’s model expands the view of harm to include the party accused of inflicting harm on the other party. Specifically, Coase demonstrates that if government regulation is put into place to prevent harm to a party, the entity that is now subjected to the regulation is now being harmed. For example, Company A...
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...Question 1 Coase, Ronald. (1937). The Nature of the Firm. Economica, 4(16), pp 386-405. I. How does the modern corporate firm emerge and why? According to Coase, firm is the system of relationships which comes into existence when the direction of resources is dependent on the entrepreneur. A modern corporate firm emerges when the entrepreneur of some sort begins to hire people. Some people prefer to be the leader while some prefer to be leaded. Individuals that prefer to work under direction of some other person would accept less in order to work under someone, and firms would emerge naturally from this. The hierarchical organization can simply be desired for its own sake. People might be willing to give up something so that they can direct others if the desire wasn’t to be controlled but to control, to exercise power over others. It means that they would be willing to pay others more than they could actually get under the price mechanism in order to be able to direct them. Also, firms might emerge if purchasers preferred commodities which are produced by firms to those not produced. However, transaction costs are involved in using the market. The price of the goods is actually lower than the cost of getting a goods or services through the market. Other necessary costs likes search & information costs, policing & enforcement costs, bargaining costs, and keeping trade secrets, can be added to the cost of procuring something from another party. This suggests that firms will emerge...
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...Transaction costs theory and the imperfect markets. Williamson’s successful complementation of the Coases approach of the firm as an alternative to reduce the cost of using the price mechanism, with Herbert Simon’s organizational theory, gave birth to the Transaction Costs Theory (TCT)1. This meant a big step, which evolved the theory of the firm, from its obsolete neoclassical toots and assumptions -of a perfect competitive market and a perfect rationality-, by adding the issues of bounded rationality and opportunism to Coases work2. Williamson opened the path to new ways of conceiving and complementing the theory of the firm in general, and the transactions costs theory in particular. By enabling to the economic theory the enhancing and the building of new connections between cognitive psychology and economics. Connections that have allowed, among other things, the development of a larger view in the roll of the firm, no only as an avoider of costs, but also as a creator of knowledge. All in better accordance with the modern firms logic of making business. In order to understand the transaction costs theory, one has to comprehend that the competitive market structure, is only a reference to be taken into account, when one analyses the observed structure of markets, which are called “imperfect competitive”, For the market is not given under a homogenous form to all economic agents, but is continuously changing under agents decisions and behaviours 3 ....
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...Abstract This paper will discuss the effect of the transactional cost on mid-size firms and the effect of the Vertical integration in regards to the reduction of transactional cost and the issue of dissimilarity of transactions. Introduction Merriam-Webster defined the organization as a company, business, club, etc., that is formed for a particular purpose, The act or process of putting the different parts of something in a certain order so that they can be found or used easily, the act or process of planning and arranging the different parts of an event or activity. (Merriam-webster.com.2015) The business dictionary defined the organization objective as The overall goals, purpose and mission of a business that have been established by its management and communicated to its employees. The organizational objectives of a company typically focus on its long-range intentions for operating and its overall business philosophy that can provide useful guidance for employees seeking to please their managers.( businessdictionary.com 2015) To address the topic we need to start by defining the main two business terms and their interrelation, which play a major role in understanding the theoretical part of the case. The firm, can simply define as it, is the set of transactions that is organized by supervisory authority instead of the market. In which the aim is to provide the set of services in one place in order to reduce the transactional cost, which by itself can be simply defined...
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...Abstract This paper discussed and explained outsourcing, identified effective techniques and methods, and why outsourcing is utilized. Outsourcing can be an effective method for improving an organization’s functionality. While outsourcing advantages can reap benefits of improved productivity and lowered costs, the disadvantages must be taken in consideration to reach success. Analyzing the different aspects of: why is outsourcing necessary, what are the potential advantages and disadvantages, and is it cost effective upon a thorough review of the market and costs associated are essential. Outsourcing a Source with Strategic and Effective Techniques The ways in which business decisions take place are increasingly complex, costs are an important part of decisions, especially the make or buy decision that is important in determining if outsourcing of off shoring takes place. The majority of literature focuses on the production cost, but these are not the only costs that need to be considered, less visible, but just as important are the transaction costs, Jacobides and Winter (2005) argue that transaction costs can be just as important as production costs, and are key in the outsourcing decisions, Barney (1991) argues it is used in the way resource allocations is assessed. To consider this it is necessary to look at how transaction cost economics can be applied to business decisions and the way that outsourcing takes place. In order to examine this concept, and the way in which...
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...Theories of the Firm To understand firm heterogeneity within industries and its relations to competitive advantage, reviewing some of the most influential theories of the firm is important. Starting with Coase (1937), academic research in economics and management has nurtured a long tradition of trying to unveil the “essence of the firm.” Some scholars believe that discovering the true nature of the firm permits understanding real- world firms. Whether things or concepts have “essences” is questionable. From a practical standpoint, finding this essence is not essential, but having a practical definition of the firm may be needed. A good “theory of the firm” is one that helps managers identify and choose the best projects among all feasible ones. It must also provide a definition of “best.” A brief review of three theories of the firm follows. The first theory views the firm as a nexus of contracts. Most valuation and project selection frameworks implicitly assume this view. The second one views the firm as an efficient solution to the problem of economizing on transaction costs. Such a view is particularly useful for understanding acquisitions and divestitures, especially in those cases involving vertical integration or outsourcing decisions. The third theory views the firm as the locus of crucial resources. This view is particularly helpful for understanding corporate strategy and value creation. The Firm as a Nexus of Contracts Some argue that the firm is nothing...
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...35) defines firms as ‘An economic organization that coordinates the process of production and distribution’. In addition, ‘Firms are arranged frameworks relating people, things, knowledge, and technologies, in a design intended to achieve specific goals’ (Clegg et al, 2011). The main concept behind firms is to transform the input into outputs (Sloman et al, 2013). To give out a few examples of firms in different production lines for instance as clothes, cars, phones and others such as Apple and Samsung, H&M and Gucci, BMW and General Motors. According to Coase (as cited in Formaini, R and Siems, T, 2003) the firms are responsible for production and distribution of goods and services and firms are of upmost importance because they reduce the transaction costs which would usually cost a lot more if carried out by an individual compared to the firm. We will discuss transaction costs in greater details; however, it’s also important to know how firms are organized and how they operate. Firms are organized and they operate in different manners and ways for instance, goods and services they produce, the industries they are located in, the size of the operating firm, and the legal structure of the firm. The legal framework of the firm is very important and will have an impact on its performance, production and operations and thus we will be concentrating on it in order to exemplify the classification of firms in different ways. In the UK, there are several types of firm, each with...
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...The DIGITAL ECONOMY I. Introduction ( Pearlson & Saunders, 2013, Introduction; Tapscott, 2014, Ch. 1) @mtpadam Week 1 1 COMMONWEALTH OF AUSTRALIA Copyright Regulations 1969 WARNING This material has been copied and communicated to you by or on behalf of the University of Newcastle pursuant to Part VB of the Copyright Act 1968 (the Act) The material in this communication may be subject to copyright under the Act. Any further copying or communication of this material by you may be the subject of copyright protection under the Act. Do not remove this notice. 1 Educational Objectives for Today • Foundations of the economy • Similarities and differences between analog and digital goods • Understand the basic concepts of the digital economy • A brief overview of the history of IT • Creative destruction and digital disruption | EBUS3050 | The Digital Economy| I. Introduction “These Google guys, they want to be billionaires and rock stars and go to conferences and all that. Let us see if they still want to run the business intwo to three years.” (Bill Gates, Microsoft, 2003) “$100 million is way to much to pay for Microsoft.” (IBM, 1982) Week 1 3 “Information technology and business are becoming inextricably interwoven. I don’t think anybody can talk meaningfully about one without the talking about the others.” (Bill Gates, Microsoft) “By 2005 or so, it will become clear that the Internet’s impact on the economy...
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...Economics (TCE) has its roots somewhere during the second world’s war, when Coase (1937) was trying to find some practical explanations related to the economic theory existing at that time. The differences between the perception of a firm or company and its correspondence in the real world have been assessed, making an empirical analysis of possible attributes that can influence their development in close relation to its internal factors and, and the market interactions as well. Following Coase’s study “The Nature of The Firm”, many other economic papers and theories have emerged in the next decades, leading to the development of different concepts like TCE, vertical boundaries of a company, interactions between company and market and optimal decision for the “make or buy” dilemma as it is mentioned also by (Lafontaine and Slade 2007). Contributions of Coase and Williamson The basics for TCE development have been defined by Coase (1937), making an argumentation in favor of lower possible cost of assessing some activities within a company rather than acquiring them from the market by a set of more costly transaction. Also, he has argued that preferential treatments a firm can get from external environments (like governments), combined with the possibility of reducing the market exchange transaction costs (by directing some resources through a defined organization) can be seen as the main reason for a firm to exist and grow. The dilemma of efficiency versus variable size of a...
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...1. Introduction and Research Question In the lectures of “Organization Theory” much information from different perspectives was presented about the issues how the literature defines a firm, how a firm can operate most efficiently and what has to be considered to generate sustainable success. For me personally the topic “resourced-based view of a company” was the most interesting one. Therefore, I was wondering if it is possible to apply a resource-based view as an innovative perspective to support the strategic decision making process of certain management sections. During this research proposal I am going to present my research strategy to answer this question. 2. Literature Review In order to prove the value of the research question a review of the relevant literature was undertaken. Obviously, the central element of my research question is “the resource-based view” (RBV). Therefore, I disclose which initial assumptions, approaches and results have been evolved about the RBV thematic in literature. The findings about the development of the concept are introduced chronologically. Moreover, a dissertation about a closely related topic to my research question is presented. As for every major business concept, there exist countless definitions about the RBV. A concise and covering one might be: “A management device used to assess the available amount of a business' strategic assets. In essence, the resource-based view is based on the idea that the effective and efficient...
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...discussion Papers Discussion Paper 2007-3 March 1, 2007 Transaction Cost Economics: An Introduction Oliver E. Williamson University of California, Berkeley Abstract: This overview of transaction cost economics is organized around the “Carnegie Triple” – be disciplined; be interdisciplinary; have an active mind. The first of these urges those who would open up the black box of economic organization to do so in a modest, slow, molecular, definitive way, with the object of deriving refutable implications and submitting these to empirical testing. The second recommends that the student of economic organization be prepared to cross disciplinary boundaries if and as this is needed to preserve veridical contact with the phenomena. The injunction have an active mind is implemented by being curious and asking the question “What is going on here?” The paper concludes with a discussion of operationalization. JEL: D2, D73, D86, L2 www.economics-ejournal.org/economics/discussionpapers © Author(s) 2007. This work is licensed under a Creative Commons License - Attribution-NonCommercial 2.0 Germany Transaction Cost Economics: An Introduction Oliver E. Williamson This overview of transaction cost economics differs from prior overviews to which I have contributed in two respects: it presumes little previous knowledge of the transaction cost economics (hereafter TCE) literature; and it is organized around the “Carnegie Triple” – be disciplined; be interdisciplinary; have an active...
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...separately. In the short term, cost or profit comparisons can be used to determine what to “make” and what to “buy.” More important, however, is the long-term question of who should make the often specific investments required for production, transportation, and inventory processes. According to Coase and Williamson, the boundaries of the firm should be determined such that the costs of coordinating economic activities are minimized. They depend on the nature of the required assets as well as on the importance, frequency, and uncertainty of the economic transactions along the supply chain. Based on transaction cost theory, some rules of thumb can be derived of what to make and what to buy. Keywords: Make-or-buy decisions, vertical integration, transaction cost theory, Supply Chain Management Supply Chain Management: Just another buzzword? What is Supply Chain Management? It appears to deal with the coordination of tasks required to make products and to get them to the customers. In Figure 1, this includes production, storage, and transportation activities. These activities have to be coordinated along the whole chain, possibly over the boundaries of multiple firms. [pic] Figure 1: Idealized supply chain Is this a new phenomenon? Hardly. Supply chains have been managed ever since human beings discovered that they are more productive when they specialize and trade the goods they produce. The coordination of the resulting processes has now...
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...Introduction: In this essay, the discussion will focus on the vertical chain of a major pharmaceutical company as well as TCE and its effect on make or buy decision. The vertical chain is ‘’ the process that begins with the acquisition of raw materials and ends with the distribution and sale of finished goods and service.’’ (Besanko et al, 2010, p119) The term vertical integration is used to describe firms that produce and sell their goods without relying on external co-ordination. Firm’s vertical boundaries can identify what to make (internally inside the organization) and what to buy (externally by using the market). Some of the pharmaceutical companies like Pfizer have strong vertical chains. So as to market its drugs in 150 countries, it gives high importance for production that starts by acquiring active pharmaceutical ingredients (API) and shifting them to manufacturing sites all across the globe. These manufacturing sites are either approved under the stringent laws of FDA or EMEA (2 important bodies responsible in monitoring the quality of registered products across the globe). Sometimes Pfizer also uses loan-licensing companies as external manufacturers when in-house facilities are not available or feasible. Once the product is manufactured, it is sent for quality control release and then packed and shipped to the first point of distribution (global hubs). From these locations; depending on the demand from each region; packed products (formulated products) move...
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