Introduction
A firm’s existence is to maximize profits for shareholders. In order to achieve that, firms seek to reduce cost while enhancing growth. Modern technology has enabled the market to be more efficient and firms may benefit with lower cost for externalizing certain activities. However, in “The Nature of the Firm” Coase (1937) argued on the cost efficiency of using the market compared to using the firm. Firms are often caught in a dilemma of vertical integration or utilizing available options in the market.
The cost involved by using the market is called transaction cost. Transaction Cost Economics (TCE) examines how firms protect its interest from the potential risk from its trading partners. The fragility of incomplete contracts …show more content…
This reduces time and cost taken for transportation, warehousing and increase production efficiency. The investment cost of these pipelines is sunk and of very large amounts solely to supply the EM’s plant. Hence, to look after its vested interest, contracts are usually committed for a long term to justify the huge investment. One day, if EM decides to ceases current partnership, the relationship-specific assets will lose its economic value. If EM is aware of CIL’s positive quasi-rent there is a possibility of holdup. In this example, the human, site and dedicated pipelines for EM represents a large investment to CIL. Assuming EM negotiates to lower the price of the chlor-alkaline products to share CIL positive quasi-rent. If the new price still allows CIL to make a positive rent, CIL will most probably agree due to the relationship-specific asset that it has invested in. Hence, positive quasi-rent exemplifies the holdup problem in relationship-specific assets.
A firm should scrutinize the elements on relationship-specific assets before entering into such a complex relationship to tie up trading partners. This is because the cost of changing partners down the road may be costly, making the make or buy decision more …show more content…
OCBC is able to benefit from the economics of scale and scope by using external parties. The printing partners are able to achieve minimum efficient scale (MES) and provide proprietary expertise at a lower cost. By using the market, agency cost is eliminated and relationship specific asset is not required. In this process OCBC reduces risk of holdups. The common issue faced would be to protect intellectual information of OCBC’s marketing collateral content and layouts. However, this risk can be kept at bay with detailed contracting by in house legal counsels. Such basic process of the bank does not require a common ownership to mitigate contractual issues, as it will not greatly impact the bank’s
A firm’s existence is to maximize profits for shareholders. In order to achieve that, firms seek to reduce cost while enhancing growth. Modern technology has enabled the market to be more efficient and firms may benefit with lower cost for externalizing certain activities. However, in “The Nature of the Firm” Coase (1937) argued on the cost efficiency of using the market compared to using the firm. Firms are often caught in a dilemma of vertical integration or utilizing available options in the market.
The cost involved by using the market is called transaction cost. Transaction Cost Economics (TCE) examines how firms protect its interest from the potential risk from its trading partners. The fragility of incomplete contracts …show more content…
This reduces time and cost taken for transportation, warehousing and increase production efficiency. The investment cost of these pipelines is sunk and of very large amounts solely to supply the EM’s plant. Hence, to look after its vested interest, contracts are usually committed for a long term to justify the huge investment. One day, if EM decides to ceases current partnership, the relationship-specific assets will lose its economic value. If EM is aware of CIL’s positive quasi-rent there is a possibility of holdup. In this example, the human, site and dedicated pipelines for EM represents a large investment to CIL. Assuming EM negotiates to lower the price of the chlor-alkaline products to share CIL positive quasi-rent. If the new price still allows CIL to make a positive rent, CIL will most probably agree due to the relationship-specific asset that it has invested in. Hence, positive quasi-rent exemplifies the holdup problem in relationship-specific assets.
A firm should scrutinize the elements on relationship-specific assets before entering into such a complex relationship to tie up trading partners. This is because the cost of changing partners down the road may be costly, making the make or buy decision more …show more content…
OCBC is able to benefit from the economics of scale and scope by using external parties. The printing partners are able to achieve minimum efficient scale (MES) and provide proprietary expertise at a lower cost. By using the market, agency cost is eliminated and relationship specific asset is not required. In this process OCBC reduces risk of holdups. The common issue faced would be to protect intellectual information of OCBC’s marketing collateral content and layouts. However, this risk can be kept at bay with detailed contracting by in house legal counsels. Such basic process of the bank does not require a common ownership to mitigate contractual issues, as it will not greatly impact the bank’s