Manner of Procuring Different Types of Inputs
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Manner of Procuring Different Types of Inputs
- Discuss the economic trade-offs associated with obtaining inputs through spot exchange, contract, or vertical integration.
In the economic environment, inputs are obtained in order to get the final product. In this manner the manager has several options such as taking simply the products from other services, signing a contract with a company which may be used in need for particular service and creating a different department providing service. These options provide different costs to the managers so before the planning, it is important to analyze a method from three methods of input: spot exchange, contract and vertical integration. In the first method, manager and the seller meet for exchange and then do their own jobs. These two parts are anonymous and they make an interaction without knowing their particular names. In the contract method, there is a professional and legal between buyer and seller. This method is beneficial if the contract between the parties is easy to be written. In the last method, the firm avoids other suppliers and determines an internal department to produce the product. A firm may lose specialization in vertical integration.
- Identify four types of specialized investments, and explain how each can lead to costly bargaining, underinvestment, and/ or a “hold- up problem.”
There are four types of specialized investments: site specificity, physical-asset specificity, dedicated assets and human capital. Site specificity means that the parties locate themselves close to each other in order to produce. Physical-asset specificity refers to the parties and their related needs. The capital equipment should be useful for the particular buyer. The third type is about the ability of change by a firm in order to exchange the product with a buyer. In the last type, it defines that workers learn how to work with a particular company. Otherwise the firm has to make a specialized investment. Bargaining process is difficult as both parties insist for their own beneficial prices. The first type called site specificity is advantageous in costly bargaining as the closeness decreases the cost. For physical-asset specificity, when the parties have common requirements, it is relatively beneficial in bargaining process. In the process of underinvestment, the third and four types called dedicated assets and human capital are important. In many cases, specialized investment is human capital. If the worker is aware that he cannot work for a long time with a firm, he cannot invest.
- Explain the optimal manner of procuring different types of inputs.
The optimal manner means the approach to minimize the costs. Therefore, spot-exchange process is applied. In case of no transaction cost and many buyers and sellers in the market, the price is determined by the intersection of supply-demand curve. The manager may buy units according to the price. In case of request of charge for that product by a supplier, the manager declines and changes the supplier. The problems may reveal when the buyer tries to obtain additional input. But these inputs may also be produced in a method of underinvestment as well in order to facilitate the exchange.
- Describe the principal–agent problem as it relates to owners and managers.
After the process of determining the best input, it is important to analyze the best effort. Due to separation between the ownership and control, there are sometimes declines in the company which is related with the managers. But the managers do not monitor the process and current situation is reflected as “bad or unlucky” year for the company. Generally, the ownership may used the benefits of decreased transaction costs but in case of separation between ownership and control, there is a problem revealed called principal-agent problem. When the owner does not monitor the problem in manager, it becomes impossible to gain the best interest. Basically, it is about the manager’s usual interest of both income and leisure. Therefore the owner should determine the hours for these two concepts. According to the profit sharing compensation schema, it is obvious that a manager cannot shirk the whole day in order to earn income. So the manager faces with trade- off as he can enjoy more with a less compensation.
- Discuss three forces that owners can use to discipline managers.
There are three forces for the owners to discipline the managers as incentive contracts and external incentives. When the earning is related with the performance bonus, rewarding CEOs becomes unfair as media frequently imply. An excessive contract which is about maximization of profits is divided into reputation and takeovers. The job mobility is related with the demonstration the company to other firms. It is about the skills of managers in order to maximize profits. An effective manager may spend time to supervise workers and to plan production outlays. The threat of a takeover is the second way of maximization profits. In case of deficiencies of profit-maximizing approach, the other firms attempt to have the company and change the management. Therefore the managers should work harder in order not be changed with new managers and not to gain fixed salary.
- Describe the principal–agent problem as it relates to managers and workers.
In the principal-agent problem in terms of the relation between managers and workers, the owner expects different objectives from the manager. It is impossible for the manager to observe each worker in the workspace. Therefore there is a problem between managers and workers similar with managers and owners. The manager should increase the profits of the company and he is paid money in return. But the benefits are directly related with the performance of workers so there are four tools for managers to observe the workers in the workplace.
- Discuss four tools the manager can use to mitigate incentive problems in the workplace.
It is divided into four tools as profit sharing, revenue sharing, piece rates and time clocks- spot checks. In profit sharing, the workers compensation depends on the profitability of the company. Therefore the workers are tied to the financial success of the firm which makes them work harder. Revenue sharing is about the productivity of the workers. For example in the food sector, the servers have low salaries but tips. If their serve is unsuccessful, tips are low and vice versa. It makes them work more and careful. In this example, what the restaurant provides to the customers is important as well such as free drinks and deserts. Piece rates are about a working system based on giving money per piece instead of a fixed salary. Especially in the marketing or insurance sector, workers gain money when they provide successful communication with the customers and they gain more per new customer. Last factor is time clocks and spot checks which refer to verification of employees working hours in the job. This factor is not so useful in principal-agent problem due to not showing the effort but it is still used. It simply measures how many hours the workers are in the workplace.
- Calculate alternative measures of industry structure, conduct, and performance, and discuss their limitations.
There are two measures according to the economists in order to calculate the concentration of the industry: concentration ratio and Herfindahl- Hirschman index. Concentration ratio measures the output in the industry having a various firms. It is used in order to show the extent of the market and how it controls the large firms in the industry. It is the level of market share of large firms in the industry. Herfindahl- Hirschman index is calculated by the shares of companies in the market. The square of the market shares of these companies are used. The value changes from zero to 10,000. The value less than 1000 refers to low concentration; the value between 1000 and 1800 refers to moderate concentration. If it is more than 1800, the markets become high concentrated. 10,000 indicated the monopoly for a company.
- Describe examples of vertical, horizontal, and conglomerate mergers, and explain the economic basis for each type of merger.
There are three types of mergers according to the economists as vertical, horizontal and conglomerate mergers. Vertical integration indicates the production of one particular product by a single firm. The several stages of the process are carried out by that company. Buyers and sellers interact and come together in the vertical merger. In this manner, the companies may provide control of what they supply, produce and do marketing. The firms may gain advantages during the marketing of products, decrease transaction cost and make realistic production planning. In the horizontal merger, the firms with the same product or service merge in order to increase the market share; to create a monopoly in the sector and to increase the level of merge. When two companies with different activities in the business world merge, conglomerate merger appears. Firms of different sectors merge and a new company is established in order to increase the value of market. This merger is different from horizontal merger because in conglomerate merger, two companies from different sectors create a single firm to produce a different product. For example a chocolate company and a beverage company merge in order to produce milk productions.
- Explain the relevance of the Herfindahl- Hirschman index for antitrust policy under the horizontal merger guidelines.
Firstly antitrust policy affects the competition in the market. The market becomes open and competitive with different governments and the laws are different. Antitrust policies are mostly written and organized by FTC and Department of Justice. The idea of antitrust policy began in the US in order not to abuse the important industries. Herfindahl-Hirschman index is used in competitive environment in order to calculate the change and concentration occurred in the market after merges. It is generally the measurement of market concentration. The enterprises which are active in the market have particular market shares and square of these shares used in this index. Delta refers to the change rate in HHI index and it shows how competitive the market is. The high level of delta raises antitrust policies.
- Describe the structure- conduct- performance paradigm, the feedback critique, and their relation to the five forces framework.
The term of conduct show how the markets behave in the sector. The structure shows the factors such as technology or concentration and the performance indicates the results in the market and social welfare. When these two points are integrated, the paradigm appears. Market structure shows a certain ways to the companies in the sector. This behavior may lead to either good or bad performance. Concentrated market results in high price with low performance. Feedback critique suggests that the causal view is not adequate for structure, conduct and performance integration. According to the critique, the conduct of the companies is related with concentrated market. Therefore when the prices are low and the profit is low, additional companies do not enter. The paradigm and feedback critique is related with the five forces framework which presents five “forces” affecting industries’ profits. These forces are entry, power of input suppliers, power of buyers, industry rivalry and substitutes and complements. These five forces conduct the companies and affect the performance.
1.2 Identify whether an industry is best described as perfectly competitive, a monopoly, monopolistically competitive, or an oligopoly.
In the competitive market environment, the companies have almost the same technologies and similar products. Monopoly refers to being the single firm in the relevant market. When there is a single provider in a particular region, the seller may capitalize on the monopoly position and as there are no alternative firms, consumer should make a choice, they can buy or cannot buy instead of trying to find a lower price. There is concentration in the companies referred to monopoly. In monopolistically competitive concept, there are both companies and consumers in the market but the companies produce relatively different products and services. If the consumer cannot change the characteristics of the product, he should accept the price determined by the buyer but if he can make sacrifice for little changes in the product, he may switch into a different brand. In oligopoly, some companies try to be dominant in the market such as airline, automobile and aerospace. The profits in oligopoly increase the interaction among the companies because the manager of this company should observe the prices of other firms in order to understand how the consumers may respond to their increase in prices.
Manner of Procuring Different Types of Inputs
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