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Communication Costs and the Boundaries of the Firm

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  • Mark Casson
  • Nigel Wadeson

Abstract

Much has been written about where the boundaries of the firm are drawn, but little about what occurs at the boundaries themselves. When a firm subcontracts, does it inform its suppliers fully of what it requires, or is it willing to accept what they have available? In practice firms often engage in a dialogue, or conversation, with their suppliers, in which at first they set out their general requirements, and only when the supplier reports back on how these can be met are their more specific requirements set out. This paper models such conversations as a rational response to communication costs. The model is used to examine the impact of new information technology, such as CAD/CAM, on the conduct of subcontracting. It can also be used to examine its impact on the marketing activities of firms. The technique of analysis, which is based on the economic theory of teams, has more general applications too. It can be used to model all the forms of dialogue involved in the processes of coordination both within and between firms.

Suggested Citation

  • Mark Casson & Nigel Wadeson, 1998. "Communication Costs and the Boundaries of the Firm," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 5(1), pages 5-27.
    • Handle: RePEc:taf:ijecbs:v:5:y:1998:i:1:p:5-27
    DOI: 10.1080/13571519884549
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    References listed on IDEAS

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    Cited by:

    1. Oetzel, Jennifer & Doh, Jonathan P., 2009. "MNEs and development: a review and reconceptualization," Journal of World Business, Elsevier, vol. 44(2), pages 108-120, April.
    2. Stephen Standifird & Marc Weinstein, 2007. "The Transaction Cost Economics of Market-based Exchange: The Impact of Reputation and External Verification Agencies," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 14(3), pages 409-431.
    3. Mol, Joeri M. & Wijnberg, Nachoem M., 2002. "Value chain envy: explaining new entry and vertical integration in popular music," Research Report 02B62, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    4. Dengu, T. & Lyne, Michael C., 2007. "Secure land rental contracts and agricultural investment in two communal areas of KwaZulu-Natal," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 46(3), pages 1-12, September.
    5. Mark Casson & Nigel Wadeson, 2007. "The Discovery of Opportunities: Extending the Economic Theory of the Entrepreneur," Small Business Economics, Springer, vol. 28(4), pages 285-300, April.
    6. repec:dgr:rugsom:02b62 is not listed on IDEAS
    7. Holger Gorg & Frances Ruane, 2001. "Multinational Companies and Linkages: Panel-Data Evidence for the Irish Electronics Sector," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 8(1), pages 1-18.
    8. Nigel Wadeson, 1999. "Two-way Communication Costs and the Boundaries of the Firm," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(3), pages 301-329.

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