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...