This website uses cookies to ensure you have the best experience. Learn more

Transaction Economic Cost Essay

1918 words - 8 pages

Transaction Economic Cost (TCE) is a transaction cost incurred in making an economic exchange. Or alternatively, a concept, which denotes the cost to using the market-such as cost of organizing and transacting exchanges--which can eliminate by using the firm. TCE argues that transactions have distinct characteristics that, in combination with the attributes of alternate governance structures, produce different production and transaction costs. These transaction cost broadly break down into motivation and coordination cost( Milgrom and Robest 1992), opportunism and agency cost( Jensen and Meckling 1976), and measurement cost (Stigler 1961). TCE argues that transactions have distinct ...view middle of the document...

One important factor also need to be consider is the specialization skills in performing out the task for the transaction. This known as the learning curve. Learning economies refer to reductions in unit costs due to accumulating experience over time. If the firm management potentially perform these activity internally, have to consider the capability of driving the average cost to minimum efficient scale (MES). As MES begets efficiency, efficiency begets cost savings.

Significant relationship-specifics assets

Management need to bear in mind that a relationship-specific assets cannot be redeployed to another transaction easily without some sacrifice in the productivity of the assets or some cost in adapting the assets to the new transactions. Meaning that switching partner is not easy as such "investment" has lock the relationship. This ultimately reducing the number of alternative trading partners, from "large number bargaining" to "small numbers bargaining". This changes known as "fundamental transformation".

Management need to aware that such transformation has significant consequences for the economics bargaining between the buyer and the seller. "Rent" and "Quasi-rent" are the case in point. The fundamental idea of this point is that the trading partner may deliberately "Holdup" the transactions . Regardless of breaching the contract, the trading partner may renegotiate the terms/price that close to the firm second best alternative option. If the firm initial capital investment is enormous, then there is higher chances that the trading partner might exploit through "holdup". This is possible through the risk of incomplete contract. Under such circumstances, the firm need to anticipate the prospect of holdup, then only made the investment decision to begin with.

In addition to this, firm need to assess that the related specific investment whether is sufficient enough to achieve full technical efficiency. As certain capital investment may needed further specialized engineering skills to achieve its full technical efficiency.

To mitigate the risk, the firm can invest in "safeguards" to improve post-contractual bargaining positions such as acquire a standby production facility for a key input as a hedge against a holdup by the input supplier.

Risk of incomplete and nexus of contracts.

Due to TCE characteristics earlier on, transaction cost economics studies how trading partners protect themselves from the associated with exchange relationships. As TCE maintains that in a complex world, contracts are typically incomplete. A complete contract eliminates opportunistic behavior. As this particular firm are complex, thus might do not fully specify the "mapping" from every possible contingency to enforceable rights, responsibilities and actions. Normally , three factors which is (1) bounded rationality which limitation on capacity possessing information as deal with complexity and cannot contemplate or enumerate every...

Other Essays Like Transaction Economic Cost

Acconting Essay

1248 words - 5 pages their cost. Cost is the value exchanged at the time something is acquired. The Monetary Unit and Economic Entity Assumptions 11. (S.O. 5) The accounting profession has developed certain assumptions that serve as guidelines for the accounting process. a. The monetary unit assumption requires that only transaction data that can be expressed in terms of money be included in the accounting records of the economic entity. b

Hca vs Fva Essay

1327 words - 6 pages cost. This means the actual amounts of money, or money’s worth, received or paid to complete the transaction. However, there are several limitations and flaws of the traditional historical costs method. But still, historical costs are the standard form of accounting due to its unique features and convention that make it better than most bases of measurements. Table of Contents 3

Historical Accounting

924 words - 4 pages accounting deals with the original monetary value of an economic items ii)Assets and liabilities are shown in their historical cost. iii)Historical cost accounting is based on the stable measuring unit of assumption. iv)Income generated in a period is matched with expenses incurred in the generation of the income. v)Historical cost accounting remain in use particularly for asset of little value(cost) Current cost accounting is also

International Trade — Part I — Why People Trade

1297 words - 6 pages on how wealth is created as specialization and division of labor facilitate trade based on comparative advantage. It also looks at what inhibits trade, from transaction costs to trade policy. Together, these basic tools prepare students to deal with the issues of international trade in Topic 14. Key Terms: voluntary exchange mutual benefit trade barriers specialization opportunity cost quota tariff division of labor comparative

Inventory System

671 words - 3 pages Conching Food Industries. This will show of how their production affects to the market, small enterprises, store owner and even such individuals. The economic growth of the food industry depends on an effective financial system. It is responsible to the earnings of Conching food Industries that can promote and accelerate their economic development. This study will be useful to make a good inventory system for Conching Food Industries. It will control

Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most

1007 words - 5 pages ) advocate “increased liquidity and lower transaction costs are associated with lower cost of capital and higher valuation”. Other studies have been conducted providing evidence about the relationship between components of transparency, liquidity, and valuation. For example, research has shown “unobserved firm-specific factors are a very important consideration in explaining differences in disclosure policy” which also correlates with cost of capital

Importance of Trust in States and Firms

1160 words - 5 pages asset as it is beneficial in reducing transaction costs, hence increasing the competitiveness of the economic entity. Transaction costs refers to the cost associated with the price mechanism to establish efficient economic exchange. This includes costs involved in bargaining, contract drafting etc. When an economic entity has established itself as a trustworthy party, transaction costs pertaining to motivation and coordination problems

Guillermo Furniture Store Scenario

634 words - 3 pages tech approach. Guillermo also realizes that the largest retailers in the nation’s headquarters enjoy competitive economic advantage and that he has lost that competitive economic advantage because the cost of labor has increased locally. Guillermo’s’ position against the competitors was solid until foreign competition came to Sonora, the largest competitors of Mexico decided to open shop at Sonora and lastly, the cost of labor increased

The Impact of Transfer Pricing on Corporate Disclosues

3494 words - 14 pages respect to their extent and range, from rather straightforward cost reduction approaches to a global realignment of the enterprise’s value chain. From a transfer pricing perspective, the challenge is to closely monitor and review the impact of these abnormal market conditions and the measures taken by management on the assumptions embedded in the transfer pricing systems. The recent economic crisis does, however, provide a unique transfer

Guillermo Furniture Concepts

650 words - 3 pages competitors previously were unable to compete with Guillermo until these foreign companies merged them all together to form a competitive economic advantage. Being able to make furniture with virtually no labor costs certainly added to the competition’s economic advantage. This is also an example of the Principal of Self-Interested Behavior which is when all else is equal, all parties to a financial transaction will choose the course of action most

Gm Hbs Case

2652 words - 11 pages ESSEC MS TF - FAM FINM 32203 – International Finance November 2011 Case #4 ‘‘Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposures’’ Executive Summary: The purpose of this case study is to analyze the different strategies to hedge against foreign exchange risks; those risks are subdivided into transaction, economic and translation exposures. Throughout this case study, we are going to present

Related Papers

Outsourcing Essay

2433 words - 10 pages with reference to economic theory. Transaction costs are the costs that are incurred as a result of managing production, internally or externally, but are not production costs.  The term is found initially with Coare in his paper published in 1937, entitled "The Nature of the Firm", and defined transaction costs as “ the cost of using the price mechanism" (Coase, 1988, p38). However, this is a rather ambiguous statement, and critics rightly claim

Sunk Cost Essay

517 words - 3 pages  Further reading Description The sunk cost is distinct from economic loss. For example, when a car is purchased, it can subsequently be resold; however, it will probably not be resold for the original purchase price. The economic loss is the difference (including transaction costs). The sum originally paid should not affect any rational future decision-making about the car, regardless of the resale value: if the owner can derive more value from

Accounting Essay

985 words - 4 pages property at a bargain price. This option gives you the right but not the obligation to purchase the office building and the land that the building sits on. In addition, a lessee should classify a lease transaction as a capital lease if it transfers substantially all the risks and rewards of ownership of an asset to the lessee but our laws do not require legal title of the asset to be transferred to the lessee for the lease transaction to qualify as a

Transaction Costs Theory And The Imperfect Markets

1429 words - 6 pages the asymmetries of information, would be to the market, like a friction to a machine. And “The most obvious sort of friction, and undoubtedly one of the most important, is the cost of transferring assets from one form to another” as John Hicks once said6. In 1940, Tibor Scitovsky introduced the label of “transaction costs” into the economic vocabulary7. And in 1937 Ronald Coase published his paper in which he attributed the existence of the