Week 2 Poulton & Lyne Peter Klaassen

Q.1. What do you understand by the terms ex ante and ex post transaction costs and what are their implications for volumes traded in the market? Transaction costs- the costs of running the economic system Ex ante: costs of searching for potential trading partners, then drafting and negotiating an agreement. These are mainly fixed costs (that is, they do not change with the volume of goods being exchange). Encourage greater volumes to gain ‘size efficiencies’. Ex post: Costs of monitoring an agreement and negotiation when a circumstance arises that is not fully accounted for in the contract. Losses and the risk of losses resulting from a breach of contract are also ex post transaction costs. These, and some of the monitoring costs, increase with volumes traded, introducing a variable cost element to ex post transaction costs.

Q.2. If a market is characterised by highly personalised transactions between trading partners who trust each other, would you conclude that costs are high or low? Low Ex-ante- dont need to search for potential partners Ex post- trust = no supprises therefore costs low dispite highly specialised assets.

Q.3. What do you understand by the term asset specificity? Assets specificity= specific= not easy to use for something elso Low opportunity cost- if dont transact then assets and/or traning or procedures cannot transfer to another buyer. Asset secificity requires that the asset have no alternative use outside of the contractual relatioship to which it is specific and that there is no market sale of the asset should the contractual relationship collapse= risk Can be: – Physical: investment in coolstore – Human: special training Assets (both physical and human) become more specific as their cost diminishes- when the asset has little value for anything else Suceptible to the holdup problem

Asset specificity can be conceptualised as having two dimensions: Asset fixity is a measure of the costs of exiting a particular investment. The discount on the use value of the asset that must be accepted to dispose of it Transaction specificity is the extent to which the use value of the asset is dependent on the continuation of a specific transaction or contract In conflict with Williamson, asset specificity can be a product of the nature of the markets rather than just the attributes of the asset.

Q.4. What do you understand by the ‘hold-up’ problem? Not perfect information Bargaining power Opportunistic behaviour

Conceptualising asset specificity

Q.5. If business partners trust each other (i.e. There is no opportunism) but do not have perfect information, would they still need a contract to safeguard large investments in highly specific assets? No The essence of promise is the contracts based on loyalty are sufficient in the absence of opportunism: relation based contracting Transaction-cost theory rests on two key behavioural assumptions 1.) the bounded rationality and opportunisim of humans and 2.) asset specificity Ex post

Q.6. What factors other than asset specificity, uncertainty and complexity tend to encourage vertical coordination? Frequency of transactions- Higher frequency of transaction increases the costs associated with ex post negotiation when circumstances arise that are not fully accounted for in the contract

Q.7. Is vertical coordination more likely in chains that deliver food products that are highly perishable? Why?

Q.8. In what way could a change in the ownership structure of a vertically integrated firm help to reduce its marginal costs of production?