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A Transaction cost Perspective on the Influence of Standards on Product Development Examples from the Fruit and Vegetable Market

  • Kirsten Foss
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    In this paper I argue that quality standards, products standards, and quality classes influence the priority that firms give to different product developments. These standards may be viewed as institutions in the sense of shared rules of behavior or codes. They have become shared because there are increasing returns to their use. These increasing returns apply both to their functions as means of reducing the costs of specifying and communicating product quality and to their functions as means of reducing buyers' costs of comparing the quality of different products - both of which are part of transaction costs. When reliable and extensively used standards exist, transaction costs are reduced. But these positive consequences to individual firms of adhering to the same standards create a sort of inertia in product development. This is because developments which are in line with existing standards will not introduce new transaction costs, while developments which break with the conformity of the standards will. In order for the latter kinds of product developments to be profitable, both development costs and transaction costs have to be overcome.

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    File URL: http://www3.druid.dk/wp/19960009.pdf
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    Paper provided by DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies in its series DRUID Working Papers with number 96-9.

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    Date of creation: 1996
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    Handle: RePEc:aal:abbswp:96-9
    Contact details of provider: Web page: http://www.druid.dk/

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    1. repec:cup:cbooks:9780521269339 is not listed on IDEAS
    2. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
    3. Barzel, Yoram, 1982. "Measurement Cost and the Organization of Markets," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 27-48, April.
    4. Schmalensee, Richard., 1980. "Product differentiation advantages of pioneering brands," Working papers 1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    5. Clark, Kim B., 1985. "The interaction of design hierarchies and market concepts in technological evolution," Research Policy, Elsevier, vol. 14(5), pages 235-251, October.
    6. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    7. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
    8. Rosenman, Robert E & Wilson, Wesley W, 1991. "Quality Differentials and Prices: Are Cherries Lemons?," Journal of Industrial Economics, Wiley Blackwell, vol. 39(6), pages 649-58, December.
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