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92 Cards in this Set
- Front
- Back
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A factor
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is employed by a person and is entrusted with the possession and apparent ownership of the goods to be sold by him/her for the principal.
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A broker
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has not the custody of the goods of his/her principal. He/she is merely empowered to effect the contract of sale. Brokers are matchmakers. The major role of private banks in 1840 was the issuance of credit
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Vertical integration
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The act by which firms choose to produce raw materials and/or distribute finished goods themselves, rather than rely on independent suppliers, etc…..Vertical integration is the merging together of two businesses that are at different stages of production—for example, a food manufacturer and a chain of supermarkets. Examples of horizontal integration include an automobile manufacturer's acquisition of a light truck manufacturer.
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Multidivisional firm
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is a parent company that has divided the company into smaller operating divisions, allowing for some decisions to be made at the divisional level and some decisions to be made by the parent companies' management.
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Industrial concentration
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is the degree to which production in an industry—or in the economy as a whole—is dominated by a few large firms. Public disclosure of details of firm’s operations is useful to ensure that investors were not being cheated by managers and that capital was being maintained
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Antitrust laws
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also referred to as "competition laws" - are designed to protect consumers from predatory business practices by ensuring that fair competition exists in an open-market economy
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Product line
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a series of different products which form a group, all made by the same company For example, a cosmetic company's makeup product line might include foundation, concealer, powder, blush, eyeliner, eyeshadow, mascara and lipstick products that are all closely related.
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Conglomeration
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is a corporation that is made up of a number of different, seemingly unrelated businesses. In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct business separately
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A matrix organisation structure
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is usually defined as one where there are multiple reporting lines – that is, people have more than one formal boss.
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Liquidity crisis
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a negative financial situation characterized by a lack of cash flow.
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Vertical Boundaries
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activities that define what the firm performs itself as opposed to purchasing from independent firms in the market.
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Make
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Make means that the firm performs the activity itself, and buy means the firm relies on an independent firm to perform the activity, perhaps under contract
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Arm’s-length market transaction
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a transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm's-length transaction is to ensure that both parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party
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Market firms
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Outside specialists who can perform vertical chain are market firms. Market firms are often recognised leaders in their field (example: United Parcel Service (UPS)).
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Vertical foreclosure
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is a type of anti-competitive behaviour. A company purchases a supplier that supplies both the company and several competitors with raw materials.
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Make-or-buy fallacies
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(i) firms should make, rather than buy assets, that provide competitive advantage for the firm (ii) outsourcing an activity reduces the costs of that activity (iii) making instead of buying captures the profit margin of the market firms (iv) vertical integration insures against the risk of high input prices (v) making ties up the distribution channel (or vertical foreclosure) and denies access to the rivals
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Accounting profit
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difference between revenues and expenses (only explicit costs) Economic profit: difference between the accounting profits from a given activity and the accounting profits from investing the same resources in the most lucrative alternative activity. It is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used.
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Contingency fund
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reserves set aside for extraordinary expenses resulting from a possible business interruption or disaster. Also called contingency reserve
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Four ways for a firm to foreclose its rivals
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a downstream monopolist acquires an upstream firm and refuses to purchase from other upstream suppliers - an upstream monopolist acquires a downstream firm and refuses to supply other downstream firms - a competitive downstream firm acquires an upstream monopolist and refuses to supply its downstream competitors - a competitive upstream firm acquires a downstream monopolist and refuses to purchase from its upstream competitors.
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Three possible limitation to foreclosure
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possible violation of anti-trust laws - price paid for the downstream firm may reflect the full value of the monopoly power (must be careful not to pay too much) - competitors may be able to open new distribution channels
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Cost centre
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a department within an organisation that does not directly add to profit, but which still costs an organisation money to operate
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A complete contract
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stipulates what each party should do for every possible contingency - a complete contract maps each possible contingency to a set of stipulated actions - no party can exploit others’ weaknesses
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Requirements for a complete contract is severe
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- one should be able to contemplate all possible contingencies - one should be able to define and measure performance - the contract must be enforceable
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Factors that prevent complete contracting
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- bounded rationality - difficulties in specifying/measuring performance - asymmetric information
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Bounded rationality
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is the idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision
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Asymmetric information
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a situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge. Information asymmetry can lead to two main problems, namely adverse selection and moral hazard.
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Adverse selection
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Immoral behaviour that takes advantage of asymmetric information before a transaction (e.g. a person who is not in optimal health may be more inclined to purchase life insurance than someone who feels fine).
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Moral hazard
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Immoral behaviour that takes advantage of asymmetric information after a transaction (e.g. if someone has fire insurance they may be more likely to commit arson to reap the benefits of the insurance)
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Timing fit
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e.g. marketing campaign must coincide with increased production and distribution of the product.
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Sequence fit
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e.g. the steps in medical treatment protocol must be properly sequenced.
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Technical specification fit (or size fit)
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e.g. the sun roof of a car must fit precisely into the roof opening Colour fit: e.g. the tops in Benetton’s spring lineup must match the bottoms
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Design attributes
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are attributes that need to relate to each other in a precise fashion. Some examples are: timely delivery of parts necessary for manufacturing process to begin; sequencing of courses in MBA curriculum
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Transaction costs
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include obvious things like time and expense of negotiating, writing and enforcing contracts. They also include subtle and potentially far greater costs that arise when one or more firms exploit incomplete contracts to act opportunistically. The adverse consequences of opportunistic behaviour, as well as the cost if trying to prevent it, are the main focus of transaction cost economics
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Relationship-specific investment
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equals the amount of your investment that you cannot recover if your company does not do business as agreed (i.e. if the agreed contract does not go ahead)
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A relationship-specific asset
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is an investment made to support a given transaction. In several situations, a firm will be able to improve the efficiency of transactions and reduce costs in the process if the supplier can invest in specialised assets. These specialised assets are known as relationship-specific assets
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Site specificity
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refers to assets that are located side-by-side to economise on transportation costs and inventory costs and to improve process efficiency (site specificity occurs when investments in productive assets are made in close physical proximity to each other). E.g. cement factories are usually located near lime stone deposits; can-producing plants are located near can-filling plants.
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Physical asset specificity
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physical assets (e.g. equipment and machinery) may have to be designed specifically for the particular transaction. For instance, the giant presses for stamping out automobile body parts (known as automobile dies) are specific to the automobile manufacturer.
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Dedicated assets
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some investments (in plant and equipment) are made to satisfy a particular buyer. Without the promise of that particular buyer’s business, the investment would not be profitable. E.g. ports investing in assets to meet the special needs of some customers.
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Human asset specificity
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some of the employees of the firms engaged in the transaction may have to acquire relationship-specific skills, know-how and information. E.g. clerical workers acquire the skills to use a particular enterprise resource planning software.
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Agency costs
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The costs that are associated with shirking and administrative controls to deter it are called agency costs
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Vertical Boundaries
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Activities that define what the firm performs itself as opposed to purchasing from independent firms in the market.
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Vertical chain
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The chain of production and acquisition that ends with the sale of a finished good or service.
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Make
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Means that the firm performs the activity itself, buy means the firm relies on an independent firm to perform an activity.
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Arm’s length market transaction
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A transaction in which the economic agents act independently and have no relationship to each other, and are both acting in their own self interest.
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Upstream
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Earlier steps in the vertical chain.
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Downsteam
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Later stages in the chain to distribution.
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Support services
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R&D, accounting, activities that support the vertical chain.
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Market firms
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Outside specialists who perform a vertical service, for example Auspost, Fedex, HR Block accountants.
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Four type of Vertical Foreclosure
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Downstream monopolist acquires upstream firm. Upstream monopolist acquires downstream firm. Downstream firm acquires upstream monopolist. Upstream firm acquires downstream monopolist.
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Vertical foreclosure
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Anti-competitive behaviour where you buy an upstream firm that also supplies to rival firms. Sometimes there are legal limits preventing vertical foreclosure. Also, sometimes the cost of acquiring the downstream or upstream firm will include all the advantages of having market power in the price. Sometimes it does work, for example when an upstream firms acquire a lot of downstream firms and creates a network which forces other firms to accept lower prices. Another example is an upstream monopoly supplier that engages in price discrimination.
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Contingency fund
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Reserves set aside for unexpected expenses from a business interruption or disaster. Also called contingency reserve.
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Agency costs
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Costs associated with shirking and also the costs of administrative methods used to control shirking. Agency costs are difficult to measure and monitor.
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Cost centre
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A department within an organisation that does not directly add to profit, but which still costs an organisation money to operate, for example accountants, marketing, human resources, R&D.
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Influence costs
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Costs of lobbying people. There are capital markets within the firm that allocate human and financial resources.
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Direct influence cost
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Time wasted by lobbying. An example of this is In-house suppliers using their influence to shield against pressure to become more competitive.
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Indirect influence cost
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Cost of bad decisions caused by lobbying.
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Complete contract
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A contract that stipulate what each party should do for every possible contingency. The requirement for a complete contract is severe.
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Incomplete contract
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Involve some ambiguity, and don’t completely spell out rights and responsibilities of both parties. Most contracts are like this, caused by the bounds of rationality (Our individual limited capacity to foresee all possible contingencies and the finite amount of time we have to make decisions), difficulties in measuring performance and information issues.
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Bounded rationality
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The idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.
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Asymmetric information
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When one party has more or superior information, generally this is the seller. This can cause one party to take advantage of the other.
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Adverse selection
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immoral behaviour that takes advantage of asymmetric information before a transaction, such as a person with bad health getting life insurance.
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Moral hazard
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Immoral behaviour that occurs after a transaction because of asymmetric information, such as someone with fire insurance committing arson.
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Timing fit
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Marketing campaigns must coincide with increased production and distribution.
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Sequence fit
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The steps of production must be done in a particular sequence
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Technical specification fit
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Sizes and specifications
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Colour fit
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When the colour themes are specific to production.
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Design attributes
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Attributes than must relate to each other in a precise fashion, for example timely delivery of parts.
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Relationship-specific investment (RSI)
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The amount of your investment that you cannot recover if the other firm does not do business as agreed.
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Quasi-rents
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Economic profit compared to the economic profit of the next best activity, this implies the difference in profit between an agreed price with another firm and the market value.
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Relationship-specific assets
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Investment made to support a given transaction. This asset cannot be deployed in different investment without some sacrifice or cost.
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Site specificity
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Refers to assets that are located side-by-side to economise on transportation costs and inventory costs and to improve process efficiency (site specificity occurs when investments in productive assets are made in close physical proximity to each other). E.g. cement factories are usually located near lime stone deposits; can-producing plants are located near can-filling plants.
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Physical asset specificity
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Physical assets (e.g. equipment and machinery) may have to be designed specifically for the particular transaction. For instance, the giant presses for stamping out automobile body parts (known as automobile dies) are specific to the automobile manufacturer.
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Dedicated assets
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Some investments (in plant and equipment) are made to satisfy a particular buyer. Without the promise of that particular buyer’s business, the investment would not be profitable. E.g. ports investing in assets to meet the special needs of some customers
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Human asset specificity
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some of the employees of the firms engaged in the transaction may have to acquire relationship-specific skills, know-how and information. E.g. clerical workers acquire the skills to use a particular enterprise resource planning software
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Rent Formula
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Rent = Supply capacity x (agreed price-cost) -Investment=Q(P*-C)-I
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Quasi rent Formula
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Quasi rent = [Q(P*-C)-I]-[Q(Pm-C)-I]
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RSI Formula
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RSI=Investment-Q(Pm-C)
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Fundamental transformation
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The relationship change from a large number bargaining situation to a small number bargaining situation.
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Ex-ante
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Before the event.
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Economies of scope
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Producing a wide range of products decreases the average cost of producing each product.
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Product market share
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Firms with larger market share or more scope are more likely to be vertically integrated.
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Property Rights Theory
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Ownership and control rights are the essential factors being debated in the make-or-buy decision.
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Forward integration
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A business strategy that involves a form of vertical integration whereby activities are expanded to include control of the direct distribution of its products.
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Backwards integration
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A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it will result in improved efficiency and cost savings. For example, backward integration might cut transportation costs, improve profit margins and make the firm more competitive
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Non-integration
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Not integrating
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Tapered Integration
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Making some and buying the rest. For example Pepsi bottles some of its products and uses independent firms for others. If the investment in RSA’s is the same by both firms, a market exchange is preferred, so non-integration is the best.
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Technical efficiency
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use least-cost production techniques ignoring agency costs from incomplete contracts. It is related to production
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ΔT
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the minimum cost of production under vertical integration minus the minimum cost of production under arm’s-length market exchange
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ΔA
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the transaction costs when production is vertically integrated minus the transaction costs when it is organised through an arm’s-length market exchange
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Economies of scope
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states that the average total cost of production decreases as a result of increasing the number of different goods produced (i.e. factors that make it cheaper to produce a range of products together than to produce each one of them on its own).
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Economies of scale
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the cost advantage that arises with increased output of a product.
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Forward integration
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type of vertical integration where a manufacturer acquires the channel of distribution of its outputs to achieve greater economies of scale or higher market share.
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