The Comparative Advantages of Firms, Markets and Contracts: a Unified Theory

The most efficient labour market mechanism depends on the advantages of specialization, workers’ costs of switching between entrepreneurs, and the frequency with which needs change. Multilateral mechanisms are more efficient when specialization is more advantageous, when it is cheap for workers to switch between entrepreneurs, and when individual entrepreneurs cannot occupy a worker on a full-time basis. Given a bilateral mechanism, employment (a firm) is more efficient than contracts when in-process adjustments arise more frequently. There exist three regions in which firms, markets and sequences of bilateral contracts are weakly more efficient than all other mechanisms in a big class

Inefficient pre-bargaining search

We identify conditions under which a bargainer makes inefficiently large (small) investments in search for information about the opponent’s reservation price. The analysis starts with the observation that a player will invest too much (too little) if the opponent’s expected payoff is decreasing (increasing) in the probability that the player gets information. We develop comparative static results about over- and underinvestment as a function of the efficiency and distributional properties of mechanisms, their dependence on search outcomes, and the nature of the trading problem. The results do not depend on any specific bargaining mechanism and are illustrated in several examples

On the role of the RBV in marketing

This short note contains some reflections on the relationship between the resource-based view of the firm (RBV) and marketing. I focus on the main proposition of the RBV—that a firm should focus on what it can do better than others—and argue that it has implications for almost all marketing activities and that much thinking in the field already is consistent with it

Class Pricing

A contract with K-class pricing divides a large set of goods or services into K classes and assigns a single price to any element of a class. Class pricing can be efficient when several different versions may be traded and it is costly to assign individual prices to all of them. It is more likely to be used when the number of buyers is smaller, the number of versions is larger, the variance in costs is smaller, and demand ex ante differs less between versions. Under simple conditions classes should be designed to minimize the sum of squared within-class cost deviations. In bilateral trades, the most efficient game form is that in which classes are designed by the player with less varied gains from trade, while the traded version is chosen by the other player. Decisions are thus made by the player who cares most about them, while the opponent prescribes a set of limits

Small forces and large firms: Foundations of the RBV

This paper was originally prepared as a basis for a lecture when I received an honorary doctorate at the Copenhagen Business School. I am grateful to Nicolai Foss for suggesting that I pursue independent publication to reinvigorate foundational research in strategic management. An anonymous referee greatly aided the exposition

Costs of implementation: Bargaining costs versus allocative efficiency

A mechanism with low direct cost of use may be preferred to alternatives implementing more efficient allocations. We show this experimentally by giving pairs of subjects the option to agree on a single average price for a sequence of trades—in effect pooling several small bargains into a larger one. We make pooling costly by tying it to some inefficient trades, but subjects nevertheless reveal strong tendencies to pool, particularly when more bargains remain to be struck and when bargaining is face to face. The results suggest that implementation costs could play a significant role in the use of many common trading practices

On the Grouping of Tasks into Firms: Make-or-Buy with Interdependent Parts

We study the division of labor within production systems and look for the optimal grouping of tasks into firms. Using a unique dataset on the global automobile industry, we present evidence consistent with the prediction that pairs of tasks requiring more frequent mutual adaptation are more likely to be performed by the same firm. By taking account of interdependencies between tasks, our econometric approach generalizes standard make-or-buy analysis and yields improvements in predictive accuracy

THE EQUILIBRIUM ORGANIZATION OF LABOR

Abstract We look for the equilibrium organization of labor. The environment has two critical features

THE EQUILIBRIUM ORGANIZATION OF LABOR

Abstract We look for the equilibrium organization of labor. The environment has two critical features: (a) Prior to working in a new plant, workers have to incur costs learning about local conditions. (b) Bilateral agreements are burdened by bargaining costs. Under weak conditions, markets, employment, and bilateral contracting dominate all other mechanisms. For each mechanism, we characterize the tasks traded in it, as well as the workers and manufacturers participating. Larger gains from specialization favor markets if firm sizes are fixed, but leads to larger optimal firm size. Lower trade barriers result in more market governance. The model does not rest on non-standard assumptions and its predictions depend on several factors that do not play a role in other contemporary theories of organization.

On brand extension as a signal of product quality

This series of discussions presents commentaries and a rejoinder on the economic perspectives on branding arising from Moorthy