Transaction Cost Economics

1. Transaction Cost Economics

2. Sources • http://en.wikipedia.org/wiki/Transaction_cost • The Logic of Electronic Markets by Malone, Yates and Benjamin, Harvard Business Review, May 1989 • E-commerce and the Market Structure of Retail Industries, by Goldmanis, Hortaçsu, Syverson and Emre, Economic Journal, June 2010 • Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site, by Baye, Morgan and Scholten, Journal of Industrial Economics, 52(4), 2004 • Bringing the Market Inside by Malone, Harvard Business Review, April 2004 • The Collective Intelligence Genomeby by Malone, Laubacher and Dellarocas, MIT Technology Review, April 2010

3. Transaction Cost Economics • A transaction cost is incurred in making an economic (or market) exchange • Search and information costs • Bargaining and contracting costs • Not production costs • The Nature of The Firm by Ronald Coase (1937) • Why firms emerge? Why hire people and not contract-out work? Because market exchanges incur transaction costs • Noble Prize in Economics, 1991 • Markets and Hierarchies by Oliver Williamson (1975) • Make or Buy? Uncertainty, specificity, opportunism • Increase transaction costs • Potentially creates holdup • Drives toward Make and not Buy • Nobel Prize in Economics, 2009 • There is a lot of empirical evidence to support the theory

4. The Electronic Markets Hypothesis The Logic Of Electronic Markets: Is your company ready for computer-aided buying and selling? by Tom Malone, JoAnne Yates and Robert Benjamin, Harvard Business Review, 1989 • Electronic Channels like American’s Saber and United’s Apollo reduce transaction costs for buyers • However, Electronic Channels create holdup of buyers by sellers • Electronic Markets further reduce transaction costs and eliminate holdup • Is an Electronic Market Feasible in Your Industry? • Can customers make purchasing decisions based on data in a computerized database? • Standard and simple to describe products are suitable for e-markets • Complex products may be suitable for e-markets if they are described by a few searchable features • Specific products (for a specific buyer) are not

5. Twenty Years Later … • Electronic Commerce influence on Company Size • Theoretically, we expect lower transaction costs, thus less hierarchies and more markets, namely … smaller companies and more of them • Evidence from the USA, since 1997, both physical and electronic businesses: • Travel Agencies • 30% less agencies • 200% more agencies with 100 employees or more • Bookstores – • 25% less stores with 10 employees or less • 200% more large stores • Car Dealerships (electronic only are disallowed) – slightly more, in particular large dealerships Electronic Commerce influence on Prices • Theoretically, we expect lower search costs, thus lower prices or at least lower price dispersion • Evidence from 2001 for popular electronic products: • 23% price gap when there are two suppliers • 3.5% price gap when there are 17 suppliers

6. The Future Recent predictions by Tom Malone

7. Bringing The Market Inside, 2004 • Internal electronic commerce reduces political and slow decision making Examples • BP achieved ten-year goals for greenhouse-gases reduction within a year • HP forecasted demand for printers through an internal market for demand estimates • Intel simulated Fab Asset Allocation through an internal future markets

8. Collective Intelligence, 2010 • What? • Create • Decide • Who? • Hierarchy • Crowd • Why? • Money • Love • Glory • How? • Collection • Collaboration • Voting • Consensus • Averaging • Prediction Markets • Individual Decisions (Markets & Networks) • Google takes the judgments made by millions of people as they create links to web pages and harnesses that collective knowledge to produce intelligent answers to the questions we type into the Google search bar • In Wikipedia, thousands of contributors have collectively created the world’s largest encyclopaedia, with articles of remarkably high quality • MIT’s Centre for Collective Intelligence has gathered nearly 250 examples of web-enabled collective intelligence