Vertical integration, Disintegration, transaction cost, regulation

Iterative collaboration?

More formal than relational, and more focused on learning between parties, and is somewhere between modular and relational collaboration. Iterative collaboration is popular and effective in today's economy of high innovation and competition. The method can be costly in the short term due to the intense work required, but often pays off in the end when a cutting edge product is produced. Iterated co-design: Is a form of iterative approach to modularity, where constans improvements and innovation is applied to the different modules, and parties learn from each other. -Effective communication is crucial in iterative collaboration. Collaborators must share information, ideas, and feedback transparently to ensure that improvements are made in subsequent iterations.

Neoclassical contract law?

Neoclassical contract law involves contractual relationships that not only facilitate trade but also incorporate additional governance structures for dispute resolution and enforcement. Some key features of neoclassical contract law include: 1. Third-Party Assistance: Neoclassical contracts may involve third-party assistance or intermediaries, such as arbitration services or mediators, to help resolve disputes and ensure contract compliance. These third parties play a role in overseeing and facilitating the contract. 2. Arbitration vs. Litigation: Neoclassical contracts often favor arbitration over litigation. Arbitration is a dispute resolution process where an impartial arbitrator or panel reviews the case and makes a binding decision, typically faster and less formal than traditional court litigation. It is seen as a more efficient way to address contract disputes. The primary goal of neoclassical contract law is to enhance contract governance and enforcement, providing more effective mechanisms to resolve conflicts that may arise during the course of the contract.

What is regulation?

Placing constraint on the firm's behavior in the public interest Socio-economic regulation (product safety, consumer protection, health, enviroment) Economic regulation (entry, price, output)

What is Rate capping:

Price adjustment with respect to inflation and increases in productivity

What does contract durability mean?

Refers to the ability of a contract or agreement to withstand changes or challenges over time without breaking down or becoming invalid. It is hard for parties to be opportunistic during the collaboration but much easier after. There needs to therefore be ways of mitigating opportunism.

Relational contract law?

Relational contracting represents a shift from traditional, transactional contracts to longer-term and more intricate agreements. It involves several key characteristics: 1. Increased Duration and Complexity: Relational contracts are designed to last for an extended period and involve more complex arrangements compared to simple, one-time transactions. 2. Ongoing-Administrative Adjustment: These contracts necessitate continuous monitoring, ongoing adjustments, and administrative efforts. They often require regular updates and adaptations to accommodate changing circumstances. 3. Mini-Society with Norms: Relational contracts create a kind of "mini-society" where the parties involved adhere to norms and principles beyond mere exchange. These norms guide their interactions and behavior throughout the contract's duration. 4. Development Over Time: Relational contracts evolve and develop over time. They may start with a basic agreement but adapt and expand as the relationship between the parties deepens and their mutual goals change. 5. May or May Not Include an Original Agreement: Relational contracts may or may not have an initial, formal agreement. Instead, they can develop organically based on the ongoing interactions and understandings between the parties. In essence, relational contracting goes beyond the limited scope of a one-time transaction. It involves long-term commitments, a focus on relationship-building, and the development of norms and practices that guide the parties' interactions over time.

How should losses be taken in to consideration in pricing decreasing cost industries:

Tax subsidy (Tax subsidies involve government intervention to provide financial assistance or incentives to firms operating in decreasing cost industries. The government can offer tax breaks, grants, or other financial benefits to offset the gap between marginal cost pricing and total costs. By reducing the tax burden on such firms, they can operate more sustainably and remain financially viable.) Averages cost pricing (Average cost pricing, in contrast to marginal cost pricing, sets prices based on the average total cost of production. This means that prices are set to cover both variable and fixed costs, ensuring that firms have a better chance of recovering their total expenses. While it may not be as economically efficient as marginal cost pricing, it helps firms avoid losses in decreasing cost industries.) Two-part tariffs (Two-part tariffs consist of two components: a fixed fee or access charge and a per-unit charge. Firms in decreasing cost industries can use two-part tariffs to recover some of their fixed costs through the fixed fee while also charging a per-unit fee that aligns with marginal cost. This approach allows firms to cover their costs more effectively.) Ramsey pricing (Ramsey pricing is a more complex pricing strategy aimed at maximizing social welfare while ensuring cost recovery. It involves setting different prices for different consumer segments or markets, taking into account their price elasticity of demand. In decreasing cost industries, Ramsey pricing can help balance the trade-off between efficiency and cost recovery by charging higher prices to less price-sensitive consumers and lower prices to more price-sensitive consumers.)

Vogelsang-Finsinger approach

The Vogelsang-Finsinger approach aims to address the problem of regulatory lag and ensure that regulated firms earn a fair rate of return on their investments while also protecting the interests of consumers. Regulatory lag refers to the time delay between a firm's capital investments and the adjustment of regulated prices to reflect those investments.

Ways to deal with uncertainty:

1, Sacrifice valued design features - more standardized good or service → Market governance 2, Preserve the design → more elaborated governance apparatus

Transfer pricing decisions:

1. Quantity: The volume decision refers to the quantity or volume of goods, services, or assets that will be transferred between the affiliated entities. This decision involves determining how much of a product, service, or resource one entity should provide to another. It is important to strike the right balance in terms of the volume of transactions. Overly large or small volumes may lead to inefficiencies, missed opportunities, or undesirable consequences. Factors influencing the volume decision may include production capacity, market demand, cost considerations, and strategic objectives. 2. Price The price decision relates to the determination of the transfer price—the price at which the transaction occurs between the related entities. This decision is crucial because it impacts the allocation of costs, revenues, and ultimately, profits within the multinational corporation. The transfer price should ideally be set at an "arm's length" price, meaning it should be similar to what unrelated, independent parties would agree upon in a comparable transaction. This ensures fairness and avoids tax manipulation. The price decision can have significant financial and tax implications. Setting the transfer price too high can lead to higher taxable profits in one entity, while setting it too low can result in lower profits and potential tax avoidance in another.

The problem of incompleteness:

The problem with contracts mentioned above and the incomplete nature in a rapidly changing environment will lead to transaction costs. The costs associated are 1. Ex-ante: meaning writing the contract to start with. And 2. Ex-post: the litigation or enforcements needed to deal with opportunism or gains between the parties.

What is Regulatory lag effect?

The regulatory lag effect can impact the implementation of pricing regulations, including marginal cost pricing. Here's how they are connected: Policy Implementation Lag: When regulatory authorities decide to implement pricing regulations, there is often a time lag before these policies are fully in place. During this implementation period, regulated firms may continue to operate under their existing pricing structures.

What is governance structure?

The set of legal or regulatory methods put in place in order to ensure effective corporate governance. -The institutional matrix within transactions are negotiated and executed. More complex goods and services demand more complex contracts and ways to govern these.

What is Price constraint

A price constraint is a restriction or limitation on the price at which a product or service can be sold. This constraint can be imposed by various factors, including government regulations, market conditions, or business strategies

What is Revenue constraint?

A revenue constraint refers to a limitation or restriction on the total revenue that a firm can generate from the sale of its products or services. It can be imposed by external factors, such as government regulations or market conditions. - risk of to low output

switching costs

A way of mitigating opportunism and deviating from the contract by using formal mechanisms to ensure that the counterpart is heavily invested in the collaboration in terms of sensitive information or innovation. Switching from the contract and acting upon opportunism will therefore be costly and less profitable.

What is classical contract law?

In classical contract law, the primary purpose is to facilitate the exchange of goods or services between parties. The identity of the parties involved is generally considered irrelevant, aligning with the "ideal" market transaction in economics. The nature of the agreement is meticulously defined, and the consequences in case of non-performance are relatively predictable. This legal framework aims to provide a structured and reliable foundation for business transactions.

Downstream integration

In this situation, there is a strong incentive to integrate downstream, meaning that the monopoly may acquire or control distribution, marketing, and retail operations.

Tools to tackle monopolies

Marginal cost pricing Profit regulation Investment requirements Incentive schemes and rate capping

What is Marginal cost pricing?

Marginal cost pricing is a pricing strategy where a firm or producer sets the price of a product or service equal to its marginal cost. In other words, the price charged to consumers is determined by the additional cost incurred to produce one more unit of the product.

Pricing in decreasing cost industries:

Marginal cost pricing will not cover costs in decreasing cost industries

What is modular integration? (Vertical integration)

Modularity refers to the degree to which a system or a project can be divided into smaller, self-contained, and interchangeable components or modules. These modules are designed to perform specific functions, and they can be developed, tested, and modified independently of the rest of the system. The concept of modularity is applicable to various fields, including computer science, engineering, design, and more. -there is a risk for the modularity trap where the end product suffers from the standardized form of production.

What are the reasons for transfer pricing?

Monitoring and Control: Transfer pricing can play a role in monitoring and controlling the operations of different subsidiaries or divisions within a multinational corporation. By setting appropriate transfer prices, the parent company can ensure that its various entities are operating in line with corporate objectives. It helps prevent inefficiencies, excessive costs, or misallocation of resources. Motivation: Properly structured transfer pricing can provide incentives and motivation for different divisions to perform efficiently. By aligning the financial interests of different units, companies can encourage optimal performance and profitability. Performance Measurement: Transfer pricing is crucial for evaluating the performance of different parts of the organization. By having accurate pricing for intercompany transactions, the company can assess the profitability and effectiveness of each division or subsidiary. Information: Transfer pricing provides valuable financial information for decision-making within a multinational corporation. It helps in budgeting, financial planning, and resource allocation. Additionally, it ensures that the financial data accurately reflects the economic reality of the company's operations.

Upstream Integration

Monopolies might also have incentives for upstream integration. This means they could acquire or control suppliers or production facilities. Upstream integration can help ensure a stable and cost-efficient supply of raw materials or components.

What is vertical disintegration?

More common now than integration because it is Hard to maintain cutting-edge in every part of the supply-chain, might be worth taking advantage of others' expertise. Contracting to other suppliers, distributors -Contracting is central in vertical integration.

The benefits of vertical disintegration must be...

outweighed by the costs and limitations of governing and enforcing the outcomes.

What is transfer pricing?

price of moving goods between different profit centers within the same company. Transfer prices are used when products and/or services are transferred between (more or less) independent company units with separate financial performance evaluations in terms of income statements or cost budgets.

What is vertical integration?

When companies streamline their operation by taking ownership in various stages of its operation. They can for example merge with suppliers and distributors.

Commercial contracting

Commercial contracting involves a range of considerations and strategies, often influenced by economizing, the characteristics of transactions, governance structures, and the presence of uncertainty. Here's an explanation of these points in the context of commercial contracting: 1. Economizing: Economizing, in commercial contracting, refers to the efforts made by parties involved to minimize costs and maximize efficiency. It involves optimizing resource allocation, reducing waste, and ensuring that transactions and agreements are cost-effective. The aim is to achieve economic gains by minimizing production and transaction costs while maintaining the desired level of quality and performance. 2. Characterizing Transactions: Understanding and characterizing transactions are essential in commercial contracting. Transactions can vary in terms of complexity, frequency, and the degree of uncertainty involved. By categorizing transactions, businesses can tailor their contracting strategies to suit the specific characteristics of each transaction. For example, routine transactions may be handled differently from highly complex and unique ones. 3. Governance Structures: Governance structures in commercial contracting refer to the mechanisms and arrangements put in place to manage and enforce agreements between parties. These structures include contracts, legal frameworks, regulations, and even informal arrangements. Governance structures provide a framework for resolving disputes, enforcing contractual obligations, and ensuring that both parties adhere to the terms of the agreement. 4. Uncertainty: Uncertainty is a prevalent aspect of commercial contracting. It can arise from various sources, such as changing market conditions, unforeseen events, and incomplete information. Effective commercial contracting involves strategies to mitigate and manage uncertainty. This may include incorporating flexibility into contracts, setting performance benchmarks, and establishing mechanisms to address unforeseen contingencies.

What is the Averch-johnson effect?

Connected to profit regulation. The Averch-Johnson Effect highlights the complexities of regulating industries with natural monopolies, where competition is limited or non-existent. Regulators must be vigilant in ensuring that regulated firms operate in the best interest of consumers and the overall economy. 1. Overinvestment: Regulated utilities may have an incentive to make excessive capital investments to increase their rate of return, even if those investments are not economically efficient or necessary. 2. Rate-of-Return Regulation: The effect is primarily associated with industries subject to rate-of-return regulation, where regulators set a fixed rate of return on the utility's invested capital. 3. Regulatory Oversight: Regulators must carefully monitor and set appropriate incentives and controls to prevent overinvestment and ensure that the utility's expenditures are in the public interest. 4. Balancing Act: Regulators face the challenge of striking a balance between allowing utilities to earn a fair return on their investments while preventing them from overinvesting and passing the costs on to consumers.

What is relational collaboration? (vertical integration)

Coordination not between managers and divisions like in Modular, but rather by long-lasting relationships based on informal elements. The decentralized nature of the collaboration is well suited for today's society where transportation and communication is so advanced. The flexible nature of these relationships are also well suited when firms disintegrate and more parties are involved. - Effective communication is a key component of relational collaboration. Open and transparent communication helps build understanding, resolve conflicts, and align goals and expectations. -Relational collaboration often has a long-term perspective. It recognizes that relationships take time to develop and strengthen and that long-term partnerships can yield significant benefits.