Managerial economics Business strategy Chapter 6 The Organization of the Firm Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 6 The Organization of the Firm
Overview I Methods of Procuring Inputs Spot exchange Contracts Vertical Integration I. Transaction Costs a Specialized Investments III Optimal Procurement Input IV Principal-Agent Problem Owners-Managers Managers-Workers Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Methods of Procuring Inputs Spot Exchange Contracts Vertical Integration II. Transaction Costs Specialized Investments III. Optimal Procurement Input IV. Principal-Agent Problem Owners-Managers Managers-Workers
Managers role Procure inputs in the least cost manner Costs C(Q) Provide incentives for A workers to put forth $100 B effort Failure to accomplish this results in a point like a Dutput $10 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Manager’s Role • Procure inputs in the least cost manner • Provide incentives for workers to put forth effort • Failure to accomplish this results in a point like A $100 80 0 $10 Output Costs A B C(Q)
Methods of Procuring Inputs Spot exchange When the buyer and seller of an input meet, exchange and then go their separate ways Contracts A legal document that creates an extended relationship between a buyer and a seller Vertical Integration a When a firm shuns other suppliers and chooses to produce an input internally Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Methods of Procuring Inputs • Spot Exchange When the buyer and seller of an input meet, exchange, and then go their separate ways. • Contracts A legal document that creates an extended relationship between a buyer and a seller. • Vertical Integration When a firm shuns other suppliers and chooses to produce an input internally
Key features Spot exchange a Specialization, avoids contracting costs, avoids costs of vertical integration Possible hold-up problem Contracting Specialization, reduces opportunism, avoids skimping on specialized investments a Costly in complex environments Vertical Integration Reduces opportunism, avoids contracting costs ost specialization, organizational costs Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Key Features • Spot Exchange Specialization, avoids contracting costs, avoids costs of vertical integration. Possible “hold-up problem” • Contracting Specialization, reduces opportunism, avoids skimping on specialized investments Costly in complex environments • Vertical Integration Reduces opportunism, avoids contracting costs Lost specialization, organizational costs