MODELS,
ORGANIZATIONS, and
FIRMS

Instructional Goals:
You will understand:
• That Markets and organizations are alternative venues for exchange
• That the choice of venue boils down to a question of information costs
• That these costs depend upon the trustworthiness of the players and attributes of the market

Additional Objectives:
 Why organizations now pay more attention to creating value for customers than to inter-organizational rivalry.
 Why building relationships with customers matters more now than ever before

Structure-conduct performance vs. price theory I
S-C-P
Market structure determines organizational conduct
Organizational conduct determines performance
PT
Game theory.
Transaction cost analysis
Contestable market analysis

Structure-conduct performance vs. price theory II
• Both: Market arrangements reflect customer tastes, wants, and needs
• S-C-P : Market arrangements/structures are givens
• PT : Actual market arrangements take the forms that they do because of conscious efforts to create and shape them. They are constantly changing

Market Power
• Collusion
• Government protection
• Superior product-market strategies or tactics;
• Special knowledge that enables you to make or deliver a product that other organizations cannot imitate or to make it at a lower cost.

Exhibit A

Transaction Cost Analysis
• Institutional arrangements reflect exchange costs:
– search costs
– negotiation costs
– monitoring and enforcement costs
• These are information costs
• Reducing them can radically affect organizational designs and market structures

Economic Revolutions of the
20th Century
• Bureaucratic revolution -- turn of the century
• Managerial revolution -- mid-century
• Marketing revolution -- NOW

Figure 1
1950

Figure 2
1950

Bottom line:
MARKETS are in, SMALL is beautiful, and CUSTOMERS are sovereign.