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Communication Costs and the Boundaries of the Firm


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  • Mark Casson
  • Nigel Wadeson


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.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 5 (1998)
Issue (Month): 1 ()
Pages: 5-27

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Handle: RePEc:taf:ijecbs:v:5:y:1998:i:1:p:5-27

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Keywords: Communication; Firm; Information; Complexity;


References listed on IDEAS
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  1. Hans Gersbach, 1996. "Vertical Relationships in the Automotive Industry: Do They Matter?," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 3(3), pages 343-350.
  2. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 21(2), pages 297-326, October.
  3. Shelanski, Howard A & Klein, Peter G, 1995. "Empirical Research in Transaction Cost Economics: A Review and Assessment," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 11(2), pages 335-61, October.
  4. Hicks, J. R., 1986. "A Revision of Demand Theory," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198285502, October.
  5. Mark Casson & Nigel Wadeson, 1996. "Information Strategies and the Theory of the Firm," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 3(3), pages 307-330.
  6. Masten, Scott E. & Meehan, James Jr. & Snyder, Edward A., 1989. "Vertical integration in the U.S. auto industry : A note on the influence of transaction specific assets," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 265-273, October.
  7. Radner, Roy, 1996. "Bounded Rationality, Indeterminacy, and the Theory of the Firm," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(438), pages 1360-73, September.
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Cited by:
  1. 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), Agricultural Economics Association of South Africa (AEASA), vol. 46(3), September.
  2. Nigel Wadeson, 1999. "Two-way Communication Costs and the Boundaries of the Firm," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 6(3), pages 301-329.
  3. 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, Taylor & Francis Journals, vol. 8(1), pages 1-18.
  4. 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.
  5. 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).
  6. Mark Casson & Nigel Wadeson, 2007. "The Discovery of Opportunities: Extending the Economic Theory of the Entrepreneur," Small Business Economics, Springer, Springer, vol. 28(4), pages 285-300, April.


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