Economics of Strategy Besanko Dranove Shanley and Schaefer
Economics of Strategy Besanko, Dranove, Shanley and Schaefer, 4 th Edition Chapter 3 Vertical Boundaries of the Firm Slide show prepared by Richard Ponarul California State University, Chico John Wiley Sons, Inc.
Contracts의 내용 l l Firms often use contracts when certain tasks are performed outside of the firm 순차적 거래 과정에서 거래 상대방이 자신에게 유리하도록 거래 내용을 변화시키려는 기회적인 행위에 대 비하여 계약을 작성 Contracts list – – the set of tasks that need to be performed the remedies if one party fails to fulfill its obligation
Contracts의 역할 l l Contracts protect each party to a transaction from opportunistic behavior of other(s) Contracts’ ability to provide this protection depends on – – the “completeness” of contracts the body of contract law (법 체제와 법 이행의 효율 성이 중요)
Complete Contract l l l A complete contract stipulates what each party should do for every possible contingency No party can exploit others’ weaknesses To create a compete contract one should be able to contemplate all possible contingencies One should be able to “map” from each possible contingency to a set of actions One should be able to define and measure performances One should be able to enforce the contract
Complete Contract (Continued) l To enforce a contract, an outside party (judge, arbitrator) should be able to – – – l observe the contingency observe the actions by the parties impose the stated penalties for non-performance Real life contracts are usually incomplete contracts
Incomplete Contracts l Incomplete contracts – – – Involve some ambiguities Need not anticipate all possible contingencies Do not spell out rights and responsibilities of parties completely
Factors that Prevent Complete Contracting l l l Bounded rationality (제약된 합리성) Difficulties in specifying/measuring performance Asymmetric information ⇒ 이러한 요인들로 인해 불완전계약 ⇒ 불완전 계약은 거래비용을 증가시켜 내부생산 을 선호하게 하는 요인
Specifying/Measuring Performance l l Terms like “excess wear and tear” may have different interpretations: 자동차 렌트할 때 계약 에 excess were and tear에 대해서는 보상토록 규정. 그러나 어느 정도 손상이 excess were and tear인지는 판단하기 어려움 Performance cannot always be measured unambiguously
Asymmetric Information l l Parties to the contract may not have equal access to contract-relevant information One party can misrepresent information with impurity ⇒ 도덕적 해이나 역선택 문제를 야기하여 시장 거래비용을 증가시키는 요인
Limitations of Contract Law l l Doctrines of contract law are in broad language that could be interpreted in different ways: 법률에서 제시하 는 표준 계약은 구체적이지 못한 경우가 많아서 해석이 다양할 수 있음 Litigation can be a costly way to deal with breach of contract Litigation can be time consuming – Litigation weakens the business relationship ⇒ 법적 소송은 시간과 비용이 많이 소요될 뿐 아니라 신뢰와 사 업관계가 깨짐으로 해서 중요한 사업기회를 잃게되는 결과 –
l l For successful coordination, one party needs to make decisions that depend on the decision made by others A good fit should be accomplished in several dimensions. Some examples are: – Timing - Size - Color - Sequence
Coordination Problems l l l Without good coordination, bottlenecks arise in the vertical chain Coordination is especially important when “design attributes” are present To ensure coordination, firms rely on contracts that specify delivery dates, design tolerances and other performance targets
Design Attributes l l Design attributes are attributes that need to relate to each other precisely; else significant loss in economic value results Some examples of Design Attributes – – – l l 전시의 작전 수행 Fit of auto sunroof glass to aperture Timely delivery of a critical component If coordination is critical, administration control may replace the market mechanism Design attributes may be moved in-house
2) Leakage of Private Information and Outsourcing Firms would not want to compromise the source of their competitive advantage l 정보의 유출을 억제하기 위한 법적 규제: 특허권 등 - Well- defined patents can help but may not provide full protection l
3) Transactions Costs l l If the market mechanism improves efficiency, why do so many of the activities take place outside the price system? (Coase) Costs of using the market that are saved by centralized direction – transactions costs
Transactions Costs l l l Outsourcing entail costs of negotiating, writing and enforcing contracts Costs are incurred due to opportunistic behavior of parties to the contract and efforts to prevent such behavior Transactions costs explain why economic activities occur outside the price system
Transactions Costs l Sources of transactions costs – – – Investments that need to be made in relationship specific assets Possible opportunistic behavior after the investment is made (hold up problem) Quasi-rents (magnitude of hold up problems)
Relationship-Specific Assets l l l Relation-specific assets are essential for a given transaction These assets cannot be redeployed for another transaction costlessly Once the asset is in place, the other party to the contract cannot be replaced costlessly, because the parties are locked into the relationship to some degree
Relationship-Specific Assets: Examples l l An aluminum refiner invests in a refinery designed to process a particular grade of bauxite ore 현대 자동차 조립 공장 근처에 건설한 부품공장 석탄광산까지 건설한 철도 특정 기업의 설비에만 적용될 수 있는 기술을 숙 련한 기술자
Forms of Asset Specificity l Relation-specific assets may exhibit different forms of specificity – – Site specificity Physical asset specificity Dedicated assets Human asset specificity
Site Specificity l Assets may have to be located in close proximity to economize on transportation costs and inventory costs and to improve process efficiency – – Cement factories are usually located near lime stone deposits Can-producing plants are located near can-filling plants
Physical Asset Specificity l Physical assets may have to be designed specifically for the particular transaction – – Molds for glass container production custom made for a particular user A refinery designed to process a particular grade of bauxite ore
Dedicated Assets l Some investments are made to satisfy a single buyer, without whose business the investment will not be profitable – – International systems’ investment in assembly line making integrated circuits for IBM A defense contractor’s investment in manufacturing facility for making certain advanced weapon systems
Human Asset Specificity l Some of the employees of the firms engaged in the transaction may have to acquire relationship-specific skills, know-how and information – – Clerical workers in a physician’s office acquire the skills to use a particular practice management software Salespersons posses detailed knowledge of customer firm’s internal organization
Rent and Quasi-rent l l The term ‘rent” denotes economic profits – profits after all the economic costs, including the cost of capital, are deducted Quasi-rent is the excess economic profit from a transaction compared with economic profits available from an alternate transaction
Rent and Quasi-rent l l l Firm A makes an investment to produce a component for Firm B after B as agreed to buy from A at a certain price At that price A can earn an economic profit of π1 If A were to renege on the agreement and B is forced to sell its output in the open market, the economic profit will be π2, π1 > π2
Rent and Quasi-rent l l Rent is the minimum economic profit needed to induce A to enter into this agreement with B (π1) Quasi-rent is the economic profit in excess on the minimum needed to retain A in the selling relationship with B. (π1 - π2)
The Holdup Problem l l l Whenever π1 > π2, Firm B can benefit by holding up A and capturing the quasi-rent for itself A complete contract will not permit the breach With incomplete contracts and relationship-specific assets, quasi-rent may exist and lead to the holdup problem 즉 A기업은 생산을 위해 이미 많은 투자를 했을 경우 π1 에 계약한 B가 계약을 위반하고 π1 보다 낮은 가 격을 제시할 경우 이를 받아들일 수 밖에 없음. π2 보다 낮은 가격이면 적자가 발생함으로 π1 - π2 사이의 가격을 받아 들이게 됨.
Effect on Transactions Costs l The holdup problem raises the cost of transacting exchanges – – Contract negotiations become more difficult Investments may have to be made to improve the ex -post bargaining position Potential holdup can cause distrust There could be underinvestment in relation specific assets
Holdup and Contract Negotiations l l l When there is potential for holdup, contract negotiations become tedious as each party attempts to build in protections for itself Temptations on the part of either party to holdup can lead to frequent renegotiations There could be costly disruptions in the exchange
Holdup and Costly Safeguards l Potential for holdup may lead parties to invest in wasteful protective measures – – Manufacturer may acquire standby production facility for an input that is to be obtained from a market firm Floating power plants are used in place of traditional power plants to avoid site specific investments
Holdup and Distrust l Potential holdups cause distrust between parties and raise the cost of transactions – – Distrust can make contracting more costly since contracts will have to be more detailed Distrust affects the flow of information needed to achieve process efficiencies
Holdup and Underinvestment l l When there is a holdup, the investment made in relationship-specific assets loses value Anticipating holdups, firms will make otherwise sub-optimal level of investments and suffer higher production costs
Asset Specificity and Transactions Costs l l Relation-specific assets support a particular transaction Redeploying to other uses is costly Quasi rents become available to one party and there is incentive for a holdup Potential for holdups lead to – – – Underinvestment in these assets Investment in safeguards Reduced trust
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