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Economics for Management Studies
April M.Franco

Definitions Complementarities: Synergies among organizational practices, whereby one practice is more effective when others are in place Conflicting Out: When a potential client approaches a professional services firm w/ new business, it may be concerned that the firm is already doing business w/ one or more of its competitors, the firm may lose this potential business b/ it is conflicted out Economies of Scale: When the AC per unit of output falls as the volume of output increases Economies of Scope: When TC of producing two different products or services is lower when a single firm instead of two separate firms produce them Fixed Costs: Costs that must be expended regardless of total output Learning Curve: When the AC of production falls given previous experience in production. The slope of the learning curve tells us by how much the AC will fall when cumulative output is doubled Path Dependence: A process shows path-dependence if past circumstances could exclude certain evolutions in the future Throughput: The movement of inputs and outputs through a production process Vertically Integrated Firm: A hierarchical (계급에 따른) firm that performs many of the steps in the vertical chain itself Holdup Problem: A problem that arises when a party in a contractual relationship exploits the other party’s vulnerability due to relationship-specific assets. For example, a seller might attempt to exploit a buyer who is dependent on the seller by claiming that production costs have risen and demanding that the price be renegotiated upward  Holdup problem raises the cost of transacting arm’s- length market exchanges in four ways (Arms-length Transactions: Amarket transaction in which autonomous parties exchange g/s w/ no formal agreement that the relationship will continue in the future) 1) More difficult contract negotiations and more frequent renegotiations 2) Investments to improve ex post bargaining positions 3) Distrust 4) Reduced investment in relationship-specific investments - Note: If an asset is not relationship-specific, quasi-rent is zero (the profit that firm can get from using the asset in its best alternative and the next best alternative are equal); if an asset is relationship-specific asset, the quasi-rent must be positive. Thus, when the quasi-rent is large, firm is to lose a lot if it has to turn to its next best alternative → the trading partner can exploit quasi-rent through holdup Complete Contract vs. Incomplete Contract  Complete contract: eliminates opportunistic behaviour; stipulates each party’s responsibilities and rights for each and every contingency that could conceivably arise during the transaction  Three factors that prevent complete contracting - Bounded rationality: Limits on the capacity of individuals to process information, deal w/ complexity, and pursue rational aims; it is not possible to contemplate or enumerate every contingency that might arise during a transaction - Difficulties specifying or measuring performance: It is difficult to write down all of each party’s rights and responsibilities under complex/subtle contract; performance are ambiguous or hard to measure - Asymmetric information: Parties do not have equal access to all contract-relevant information; the knowledgeable party may distort or misrepresent that information Quasi-Rent: An amount equal to the difference b/n a) the revenue a seller would actually receive if its deal w/ a buyer were consummated according to the original terms of the implicit or explicit contract, and b) the revenue the seller must receive to be induced not to exit the relationship after it has made its relationship-specific investments Relationship-Specific Investment: An investment made to support a given transaction  Firms that have invested in relationship-specific assets cannot switch trading partners w/out seeing a decline in the value of these assets; RSI lock the parties into the relationship to some degree → large numbers bargaining situation to a small numbers bargaining situation (fundamental transformation)  Forms of Asset Specificity - Site specificity: Assets that are located side-by-side to economize on transportation or inventory costs or to take advantage of processing efficiencies - Physical asset specificity: Assets whose physical or engineering properties are specifically tailored to a particular transaction (inhibits customers from switching suppliers) - Dedicated assets: Investment in plant and equipment made to satisfy a particular buyer. W/out the promise of that particular buyer’s business, the investment would not be profitable - Human asset specificity: A worker, or group of workers, has acquired s
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