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Real Firms, Transaction Costs and Firm Development: A Suggested Formalisation

Author

Listed:
  • Michael Dietrich

    (Department of Economics, University of Sheffield, UK)

  • Jackie Krafft

    (Université Nice Sophia Antipolis
    GREDEG-CNRS)

  • Jolian McHardy

    (Department of Economics, University of Sheffield, UK)

Abstract

The motivation of this discussion is threefold: to integrate transaction costs (TCs) into a standard model of the firm; to examine the interaction between organisational factors (i.e. TCs) and standard demand-cost factors; and to analyse key propositions of transaction cost economics with the general model. Two sets of results are derived. First, when analysis is based on significant interaction between organisational effort and production costs two possible organisational solutions can exist. First we have a “normal” relationship that the existence of small firms is subject to a threshold effect for transaction complexity. Secondly large firms can develop because of interactions between organisation effort and marketing and production costs. A second key result concerns strategies to shift from small to large solutions that can be based on either “small steps” or “developmental leap”. The viability of these alternatives is shown to depend on transaction complexity that affects the transition costs involved. In short these findings collectively indicate that analysis of the interaction between organisational and technical aspects of the firm using a formal method does indeed add value in terms of our understanding.

Suggested Citation

  • Michael Dietrich & Jackie Krafft & Jolian McHardy, 2015. "Real Firms, Transaction Costs and Firm Development: A Suggested Formalisation," GREDEG Working Papers 2015-08, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  • Handle: RePEc:gre:wpaper:2015-08
    as

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    File URL: http://www.gredeg.cnrs.fr/working-papers/GREDEG-WP-2015-08.pdf
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    References listed on IDEAS

    as
    1. Garrouste, Pierre & Saussier, Stephane, 2005. "Looking for a theory of the firm: Future challenges," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 178-199, October.
    2. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    4. repec:hal:journl:halshs-00624266 is not listed on IDEAS
    5. Steven Tadelis, 2002. "Complexity, Flexibility, and the Make-or-Buy Decision," American Economic Review, American Economic Association, vol. 92(2), pages 433-437, May.
    6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    7. Künneke, Rolf & Groenewegen, John & Ménard, Claude, 2010. "Aligning modes of organization with technology: Critical transactions in the reform of infrastructures," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 494-505, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Transaction costs; real firms; small firms; large firms; firm development;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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