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STR203, Week 7 Notes

by: Danielle Katan

STR203, Week 7 Notes STR203

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Danielle Katan

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About this Document

Notes from 2/23 and 2/25
Economic Theory of Organizations
Class Notes
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This 4 page Class Notes was uploaded by Danielle Katan on Sunday February 28, 2016. The Class Notes belongs to STR203 at a university taught by Gilbert in Spring 2016. Since its upload, it has received 17 views.


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Date Created: 02/28/16
STR203     February  23,  2016   Game  Theory  –  economic  perspective  to  behavior     • Best  you  get  is  a  range,  right  within  a  certain  tolerance     • Profiling  à  identify  rivals  behavior     • Assumes  rationality,  however  people  don’t  think  systematically     Price  is  revealing,  it  provides/absorbs  information  like  a  sponge     • Determined  by  marginal  value     • Doesn’t  reflect  all  costs     o Ex.  having  to  do  an  extra  step     Transaction  costs  associated  with  capturing  information   • Search  costs     • Cost  of  asymmetry  –  if  one  person  knows  what  another  doesn’t  it’s  a  cost  to   them   Contracting  costs,  reaching  an  agreement     • Bargain,  enforcement,  write/document,  policing  each  other/  enforcement     Firms  contracting  costs  aren’t  equal  to  individuals,  advantages:     • Frequency,  repetitive     • Bulk  material  &  return  customers,  relationships  vs.  one  time  purchases     • Ask  the  right  questions     • Employees  –  paid  less  but  have  less  risk;  ex.  Average  employees  don’t  have   agreements     Coase  –  the  nature  of  a  firm  –  use  a  firm  when  it  costs  less  than  going  into  the   market  to  complete  a  project     Decision-­‐making  –  has  various  levels  of  complexity     • If  not  made  in  timely  manner,  organization  is  paralyzed,  can’t  go  forward     Volume  of  decision-­‐making  increases  à  complexity  &  time  increase     • Can’t  run  a  business  as  efficiently  if  the  pace  is  slow     Firms  stop  growing  when:   • Too  large/diversified  to  manage  business     o Too  many  internal  costs,  ex.  Management     o Could  no  longer  coordinate/organize  actions     o Can’t  focus  on  necessary  activities     o Need  additional  management,  sometimes  in  pieces     • Transaction  costs  =  marketplace  costs     Ex.  Few  firms  that  have  divided  into  smaller  businesses:  Xerox,  Conoco  Phillips,   Apple/Alphabet     Firms  –  central  planning  systems,  no  free  trade  within   • Managers  control  asset  allocation  –  don’t  always  direct  to  the  most  efficient   uses     • Employees  have  no  real  incentive  to  participate  in  better  solution  –  no  direct   gain     Firms  has  benefits  –  ease     Knowledge  is  property  à  has  rights  à  value  à  income     Purchase  of  land  based  on  buyers’  specific  knowledge  à  better  use  of  the  property  =   more  value     Specific  knowledge  creates  economic  consequences     • Creates  property  rights     • Difficult  to  transfer  to  someone  else     Oliver  Williamson  –  there  are  costs  to  our  relationships     • Putting  value  on  it,  give  and  take     • Relationships  develop  between  entities  and  groups       • Asset  specificity  –  assets  have  a  use  but  not  many  alternative  uses     o Ex.  putting  a  factory  in  a  region  for  a  special  customer     o Ex.  modifications  to  packaging  –  equipment  just  for  triangle  milk   cartons     • Investments  can  be  difficult  to  maximize   o Geographic,  unique  equipment,  technology,  human  skills   o Ex.  Manufacturer  of  chem  equipment  that  was  difficult  to  use;   dedicate  a  business  day  to  explaining  equipment  to  university   students     • Conflicts  can  develop     Aluminum  can  products  –  indistinguishable  products  =  commodity     • Miller  used  two  manufacturers     o Has  buyer  power   o Proximity  &  price     • Bilateral  monopoly  –  supplier  is  a  hostage  of  the  company     o Benefits  to  producers:   § Long  production  runs,  stability,  predictable  returns     • If  one  factory  tries  to  raise  prices,  they  can  shift  how  much  they  buy   (quantity)  from  each     • Can  threaten  to  create  own  can  company  (vertical  integration)     • Can  companies  need  to  comply/stay  afloat  (need  to  maintain  costs)   o Lower  costs  by  updating  equipment/cutting  overhead     • Difficult  shaped  cans;  hart  to  hold  not  equal  to  hard  to  make     o Costs  cant  be  as  low   • Marketplaces  –  once  you  pull  away  big  players  everyone  else  is  small     Small  companies  lack  resources  to  get  things  done  –  lack  certain  technical   knowledge  (ex.  can  production)   • Operating  at  the  long  tail   • Less  production,  smaller  lot  size     • Less  bargaining  power     • More  difficult  if  they  want  to  produce  own  packaging  for  example     • Have  to  hold  inventory  for  longer  (value)     February  25,  2016   Knowhow  –  specific  knowledge  creates  opportunity     • Economic  consequences  and  value     • Difficult  to  transfer  knowledge/keep  it  secure  à  possible  for  people  to  leave   with  it  and  start  their  own  firm  (costs  associates)   Asset  specificity     • Miller  Case     • Leverage  over  suppliers  –  buyer  &  supplier  power   • Long  run  programs,  stability  (maintain  partnerships)   • Big  firms  are  dealt  with  in  contracts     Crown  Cork  &  Seal  –  other,  look  at  industry  differently     • Hard  to  hold  cans     • How  to  compete?  Understand  marketplace     Everyone  else  is  small  if  major  companies  contract  the  major  suppliers     • Smaller  players  have  to  really  understand  the  product,  don’t  necessarily  have   the  resources     • Understand  their  product  and  not  other  products     • Focus  on  small  customers  who  need  their  help,  capture  supplier  power     • Extraction  of  one  party  to  another  (consumer  value)     • “The  long  tail”     • Internalize  costs,  find  a  way  to  minimize     Williamson  –  opportunism  is  not  “good”     Aluminum  can  manufacturing,  demand  >  supply     Rivals  are  not  only  the  only  competitors,  everyone  is  looking  for  hteir  share  of  the   market     Five  forces  to  capture  economic  value;  economic  value  in  any  market     5  constituents:   • New  entrant     o Chance  of  new  entrants  penetrating  market  is  small     • Customer     o Don’t  claim  much  of  economic  value,  can’t  change  the  price  much   o Do  customers’  opinions  weigh  in?  Isn’t  affected  much  because  of  the   enormity  of  production/market     o Small  niche  opinions  don’t  affect  overall  market,  large  players  can   make  strategic  changes  to  make  a  slightly  different  product  that’s  in   demand,  ex.  Craft  beer     o Costco  as  a  buyer  could  swing  a  market     o Consumers  can  make  a  firm  exit       • Substitute     o For  beer  –  Mikes  Hard,  aren’t  capturing  much  value,  wont  impact   overall  value     • Suppliers     • Firm  &  rivals     o Bulk  of  value  going  to  firm  and  rivals,   o Can  do  anything  they  want  with  price,  consumers  decision  to  drink   the  soda  or  not     Ex.  costs  to  strip  –  don’t  need  two  CEOs  (would  get  a  settlement),  delivery  guys,  etc.     Ex.  Germany  story  –  said  they  would  have  to  reduce  price  by  35%,  some  point   where  they  would  have  to  compromise,  both  parties  have  some  power  in  the   relationship     Relationships  are  difficult  to  monetize/have  complexities     • Ex.  geographic  location,  specific  equipment,  tech/human  skills     • Location  can  be  imperative     Subject  to  opportunism     Why  pay  more  because  of  a  relationship?  Bounded  rationality  (know  what  you   know,  don’t  know  what  you  don’t  know)     • Don’t  always  have  time  to  get  right  info  (as  a  customer)   What  about  created  value     Customers  don’t  provide  estimates  of  value  of  the  product  to  them  (their  value   propositions)   • Create  value  beyond  price     If  we  charge  higher  do  we  take  advantage?  No  because  we  don’t  know  how  much   they’re  willing  to  pay,  it’s  probably  not  more  than  the  value  to  them   Not  all  of  opportunism  is  bad  –  Machiavellian  –  self-­‐interest  with  guile     Could  it  lead  to  cheating,  deliberately  confusing  or  misleading  behavior?    à   No,  always  ways  to  enforce  within  a  company     Are  you  taking  advantage  of  rivals  with  asymmetry?  Asymmetry  is  a  transaction   cost;  other  elements  of  opportunism  don’t  fall  into  that     Boundaries  –  to  relationship/investment  –  owners  settle  disputes  by  directive,   governance  structure     • Marketplace  boundary  =  price,  governs  supply/demand     Relationships  create  and  eliminate  transaction  costs     Rivals  working  together  to  be  better  off  for  everyone     High  cost  of  obtaining  information     Timeline  of  consumerism     1. 1950s:  individual  store  for  each  item     2. Marshall  Fields  –  1950s  first  department  store,  compeditors  all  in  one  place,   only  way  to  get  Nash  equilibrium     3. Shopping  malls     4. Mega  malls  à  entertainment  (all  in  one)     5. Search  engines     Collapse  transaction  costs     Ex.  meal  waiting  at  your  door  –  will  the  model  work?     • Initially  in  large  cities  (NYC,  SF,  LA,  etc.)     • Might  survive  because  population  of  young  execs.  so  large     • Ex.  Wegmans  ready  meals  could  take  over  a  more  temporary  substitute     Ex.  stitch  fix,  custom  –  send  you  clothing     • Reduce  transaction  costs/time        


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