the costs of providing for some good or service through the market rather than having it provided from within the firm. (Ronald Coase)
It contains Search and information costs, Bargaining and decision costs, and Policing and enforcement costs.
Three dimensions along which transactions may vary: asset specificity, uncertainty, and frequency
the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent
the agent’s actions affect the principal’s payoff, but they are not directly observable by the principal, or they are not verifiable to outsiders.
The central dilemma is how to get the employee or contractor (agent) to act in the best interests of the principal (the employer) when the employee or contractor has an informational advantage over the principal and has different interests from the principal.
A transaction takes place whenever a good or a service passes from one party to another.
Transaction done within the market:
Unexploited未被利用的 economics of scale and scope
Result in a reduction on unit costs as total output increase
Give an advantage to the specialised supplier, which can aggregate集合 demands from a number of firms
A small firm should buy rather than make the product
If there are large number of suppliers. In this case, there would be more competition, so the prices of the products would be comparatively low, and there would be large range of choice.
If the governance cost is high.
The incentives required to ensure good performance
Cost of sanctions
Difficulty of controlling opportunism of employees
Complexity of the firm
Length of the chain of commands
Transaction done within firm:
Opportunism: stakeholders (esp. suppliers) may exploit lack of information on their products and activities, limited when there are repeated orders. If high opportunism, then internalization
Small number of suppliers: monopolistic power, reducing bargaining power of buyers
Assets specificity: means the degree to which resources are specific to their current use (i.e. opportunity cost). Assets include site specific, physical specificity, human assets and dedicated asset specificity (for the needs of a single customer). The greater the specificity the more likely the internalisation.
Firm-specific knowledge: special knowledge on market, product, production technology gives a competitive advantage, firms specific knowledge tends to favour internalisation of production activities and internal control
Uncertainty about the future: In an uncertain world a large number of contingencies would have to be covered making contract more complex and expensive. This makes coordination within the firm more attractive.
Operational definition:
(Legal) A legal entity brought into existence存在 by registration under companies’ legislation;
(Government) the smallest combination of legal units which have a certain degree of autonomy自治 within an enterprise group;
Conceptual definition:
The system of relationship which comes into existence when the direction of resources is dependent on the entrepreneur. (Coase, 1937);
A conscious有意识的 wilful effort to organise economic activity that consists of a collection of contracts when more than one party is involved. (Acs and Gerloswski, 1996);
In an economic sense, the identifying characteristic of a firm is the suppression抑制 of the price mechanism. Within a firm resources move according to management decision rather than in response to price signal. (Ferguson et al., 1993)
Why firms:
Firms arise voluntarily自动地 because they represent a more efficient way of organising production…the main reason why it is profitable to establish a firm would seem that there is a cost of using the price mechanism and by organising production under the direction of an entrepreneur these market costs can be reduced. (Coase)