Key characteristics of TCE. The vertical boundaries of a firm and the critical role played by coordination in a vertical chain.
Costs in economic activity.
There is a set of economic principles that can be applied to a large number of business and which are fundamental to the existence of the firm. Business managers perform daily business activities and these activities have costs.When a firm produces a product or a service incurs various costs and understanding the nature of these costs, how they happen, are avoided, modified, and minimized, gives us a broader perspective to decision-making to maximize results.
Businesses often deal with the total cost, average, marginal, among others, in the cost structure there are fixed costs, variable costs, avoidable costs andcosts to be incurred, no matter what. When a firm is organized, there are processes of coordination and control that are necessary to facilitate the flow of information between the units and they influence in decision-making costs. Milgrom and John Roberts, explains the importance of coordination of economic activities when the processes are related to each other, and if the relationship is notefficient, then it loses value in economic transactions.
How to deal with the costs?
The implementation of the strategy is to make the best use of resources to obtain better results. The outcome of the choice of decisions shows that managers have good or bad choices. In making decisions, the concept of opportunity cost helps firms make better choices. Opportunity cost is the value of theresource in its best alternative use, the better return that the firm can get whether the firms invest the same amount of resources in other activities of similar risk, the opportunity cost reasoning about alternative offers the displacement of factors of production to another activity.
Understanding these costs allows us to look for a structure of a firm and noted that some activities areperformed internally and part may be entrusted to other firms. Economic exchanges, conducted by the market when costs are assessed in points of view as economies of scale, security, expertise, among others, could be run internally.
Transaction cost economics.
A transaction is the basic unit of economic activity, a transaction occurs when a product or service is marketed through atechnologically separable interface (Williamson, 1993). Transaction cost economic have distinct characteristics and combined with governance structure produce different transaction costs. It is important to know some characteristics of TCE to understand how these transactions costs arising from these economic transactions and how influence in decisions to internalize these economic transactions.
Transactionshave three important characteristics. The first important characteristic is called specific asset, refers to an investment in a very specific (assets, people, equipment, etc.) that enable a firm to perform a business transaction of high value. If this specific asset is intended for other activity, it will not meet this new transaction without involving a change in new costs for adaptation.
Thefirms often do this type of investment are motivated to save on transportation, inventory maintenance, development of specific equipment for the economic activity, hiring and retention of people with expertise. For example, a technology firm that produces software for Automate Teller Machine (ATM) investing in hiring a team of people with security expertise to develop routines to help prevent theviolation of financial transactions. This type of investment can lead to a dependent relationship between the parties, making a change of partner and reducing the value of the investment.
The second important characteristic is called quasi-rent. This is a temporary gain in the short term, payment is received by a business activity plus the opportunity cost, which can be obtained by a...
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