EVERYTHIIIIING Flashcards
(134 cards)
1
Q
Information Assymmety
A
When one party has more /different information than the other
2
Q
Adverse selection (hidden information)
A
When sellers have information that buyers dont or vice versa
3
Q
Screening
A
Increasing observability: The seller can screen and select the buyer with the desired characteristics
4
Q
Moral Hazard (Hidden action)
A
One party has better information than the other after signing the exchange contract
5
Q
Signalling
A
Attempt at showing hidden information so that buyer can be sure of the quality
6
Q
Mutual insurance companies
A
Customers are also shareholders of the firm (no abusive claims)
7
Q
Ex ante
A
Before contract is signed (risk of Adverse Selection)
8
Q
Ex post
A
After contract is signed (risk of moral Hazard)
9
Q
Game Theory
A
A formal way to analyze/conceptualize strategic interaction among a group of rational players who behave strategically
10
Q
Three steps of Analysis
A
- Problem formula (question)
- Model building (who, what, payoffs etc)
- Decision (using game theory analysis)
11
Q
Assumptions of Game theory
A
- Players aim to maximize profits
- Rationality (all players are perfect calculators) #
- Common rules
12
Q
Coordination Game
A
Players must coordinate their decisions in order to reach the outcome that is best
13
Q
2-Entry game
A
A number of players have to decide simultaneously if they want to enter a market
14
Q
Prisoners Dilemma
A
Situation where if both settle, there is minimum payout but if one confesses and the other doesnt, one of them gets maximum profits while the other looses. If both confess both loose.
15
Q
Dominant strategy
A
The best strategy whatever the other player does
16
Q
Nash equilibrium
A
A set of strategies one for each player such that each players strategy is a best response to other strategies (no incentive to unilaterally change my strategy)
17
Q
Auctions
A
When there are several people involved in buying one thing
18
Q
Dutch auction
A
The auctioneer starts very high and goes down until someone says they’ll take it
19
Q
Agency theory
A
Defining the best reward structure in the context of incomplete information and conflicting interest
20
Q
Positive Theory of agency
A
How do contracts affect behavior of participants
What can be done to reduce agency cost
Which governance mechanisms can solve agency problems
21
Q
Theory of principal and agent
A
How should the principal design the agents reward structure
Which contract will be the efficient/optimal under different levels of risk attitude outcome uncertainty, task measurability, information asymmetry
22
Q
Outcome based incentives (Rent contrat)
A
Agent is rewarded based on the outcome achieved
E.g. Annual bonuses, commissions, profit sharing or stock options
23
Q
Benefits of Information enhancing systems
A
Principal can asses the behavior and performance of agents
shareholders have information to control behavior of managers
24
Q
Bonding
A
Arrangement that penalise agents (managers) for acting in ways that violate the interst of principals (shareholders) or reward them for achieving principals goals
25
Monitoring
Observing the behavior and performance of agents
26
Unrelated acquisitions
A firm is acquiring another firm that uses very different assets, resources and capabilities (costly for shareholders and almost never increase profits of the nerwly formed firm)
27
Stock option
Holding of firms sock by managers --> more likely to make decisions consistend with the shareholders interests
28
Behavior based contract
| wage contract
Fixed salary --> wage contract
(if the principal can accurately evaluate the effort of the agent he/she can reward on the basis of the real effort invested
29
Forcing contract
Principal promises to pay a certain amount if the agents effort reaches a predetermined level. If that level is not attained the agent gets nothing
30
Behavioral theory of the firm
Focuses on firms behavior and decision-making
31
Bounded ratinonlity
No one is a human calculator...
32
Local search
Solutionas similar to the current operating process
33
Path dependency
Tendency to replicate decisions from the past
34
Behavioral theory of the firm stuff to keep in mind
1. Firms are complex entities dealing with several contradictory objectives
2. Individuals participating in firms are boundedly rational and can make suboptimal choices because of incomplete information
3. Firms generally tend to manage more efficiently current operating procedures rather than trying out new ideas
4. This causes systematic and significant differences in performance among firms (heterogeneity)
- -> Managers are required! Influence behavior and decision making of the organization
35
Transaction cost economics
The decision to "make" vs to "buy"
36
Vertical integration
internalizaton (do it internally within a firm) of vertical transactions formerly done on the market (the combination in one firm of two or more stages of production normally operated by separate firms.
)
37
Main Argumment of TCE
In some cases the cost of using the market increases substantially and surpasses the technical efficienceis provided by the market
38
Transaction costs
Price + specific transaction costs, which agents (buyer and or seller) have to bear
39
Two main behavioral assumptions of TCE
Bounded rationality & Opportunistic behavior
40
cost of bounded rationality
Identifiyng the needed resources, searching for the right supplier (costly &time) writing contracts (time), contracts are risky
41
Opportunism transaction costs are determined by
Asset specificity Uncertainty and frequency.
The greater these are the more expensive the use of the market and the more efficient is in house production
42
--
-
43
Asset specificity
Assets are specific when the supplier cannot redeploy them to an alternative use (eg. sell them) without a significant reduction in value
44
Frequency
How frequent are transactions? (Indirect/reinforcing impact on make or buy decisions)
45
Three core topics of economic theory
1. How is economic activity coordinated
2. What explains input/output prices
3. How to understand the dynamics
46
Economic theory Two approaches
1. Population ecology --> organizational ecology --> Industry level
2. Theory of evolution --> Evolutionary economics --> firm level
47
The VSR principle
1. Variation given spiecies
2. Selection of the fittest
3. Retention or heredity
48
Variation EE
Two main types:
1. Exploitation (Firms refine existing process)
2. Exploration (firms try out new ideas)
49
Factors driving variation
1. Prior routines --> Path dependency
2. Information available & bounded rationality
3. Satisfying rather than optimizing
50
Corporate strategy
Defines the scope of the business in terms of the industries and markets in which it competes
51
Business Strategy
Is concerned with how the firm competes within a particlular industry or market
52
Funcional strategy
The detailed deployment of resources at the operational level (eg. Marketing)
53
Competetive advantage
A firm has a competetive advantage if it is able to create more economic value than rival firms
54
Economic value
Is the difference between the percieved benefits gained by a customer that purchases a firms products or services and the full eonomic cost of these products and services
55
Sustainable competetive advantage
A firm posesses a sustainable competetivea advantage when it has value creating processes and positions that cannot be duplicated or imitated by other firms
56
Industry
A group of firms producing products that are closely related
57
-
--
58
Product differentiation
Providing something unique that is more valuable to customers than the cost of providing it
59
Establishing a competetive advantage (2-conditions)
1. Scarcity
| 2. Relevance
60
Developing resources and capabilities
1. Replicate capabilities internally
| 2. Develop new capabilities
61
How can firms develop new capabilities?
1. Develop internally
2. Mergers and Acquisitions
3. Strategic alliances
62
Strategic alliance
A cooperative relationship between firms involving the sharing of resources in pursuit of common goals
63
Organizational learning (def)
A change in the firm that occurs as a function of experience
64
Exessive experience?
1. Experience quickly yields redundant knowledge
2. exessive experience leads firms to overlook alternate technologies/processes adopted by younger, more agile & alert commpetitors
65
Causal ambiguity
Weak awareness of the causal linkages between the actions taken and the outcomes achieved
66
Sources of causal ambiguity
1. Process complexity and interdependence
2. Elapsed time since process development
3. Unclear outcomes, outcomes with fuzzy performance
67
Assumptions of the ideal market
- There is atomicity; many small buyers and sellers (no one can influence the price)
- There is free entry/free exit of firms
- There is perfect information
- Products of homogeneous
68
Management under SET
- Firms cannot change
- There is no room for differentiation = isomorphism
- No room for competetive advantage
69
Six coordination mechanisms of Mintzberg
1. Direct supervision
2. Standardization of work processes
3. Standardization of outputs
4. Standardization of skills
5. Standardization of norms
6. Mutual adjustment
70
Assumption of game theory
- Players aim to maximize profits
- Rationality -- Players are perfect calculators
- Common knowledge (Each player knows the rules of the game)
71
Entry game
A number of players have to decide simultaneously whether or not to enter a market
72
Agency theory assumptions
- Self-interest
| - Opportunistic
73
Monitoring
Observing the behaviour of agents
74
Bonding
Arrangements that penalise agents (managers) for acting in ways that violate the interests of principals (shareholders) or reward them for achieving principals goals (signalling))
75
Transactional cost ecomiomics assumptions
- Bounded rationality
| - Opportunistic behavior
76
Advantages of internal production
- Ability to negotiate on a long term basis a fair - internal - price, for the benefits of the whole firm
- No costly last minute surprise about quality, availablility, since information is available within the firm
- Relationships between "internal" suppliers and "internal" buyers are coordinated via authority
77
Location specificity
buyers and sellers locate fixed assets in close proximity to minimize transport and inventory costs, or to make the process possible
78
Equipment specificity
One party or both parties have to use equipment that is dedicaed to a particulat (limited) use
79
Human capital specificity
Emoloyees develop skills that are specialized to a particular relationship or a given organizatin
80
carrying capacity
Environments maximal load. It is the maximum population size of the species that the environment can sustain indefinitely, given the resources available in the environment / habitat
81
Niche partitioning
The environment is eventually shared in various areas to give room for all members, which are selected in/out by natural selection
82
Inertia
Such an evolution, from generalist to sepcialist, is slow, difficult, and often unsuccessful
83
Corporate strategy
Defines the scope of the business in ters of the industries and markets in which it competes
84
Return on Equity
A measure of how well a compay used reinvested earnings to generate additional earnings
85
Return on assets
How much money the company makes with its assets and an indicator of how profitable a company is
86
Return on Sales
A firms operating profit margin, detects operational efficiency
87
The intensity of industry competition and industrys profit potential is a function of these 5 main factors
1. Threat of new entrants
2. Suppliers
3. Buyers
4: Product substitutes
5. Intensity of competition among rivals
88
Economies of scale
Deter entry by forcng the entrant either to come in on large scale or to accept a cost disadvantage
89
How can firms develop new capabilities
1. Develop internally
2. Mergers and acquisitions
3. Strategic alliances
90
Cost leadership
requires doing things more efficiently. Cost leadership is a term used when a company projects itself as the cheapest manufacturer or provider of a particular product or commodity in a competition. It is difficult to deploy the strategy because the management must constantly work on reducing cost at every level to remain competitive. It greatly benefits from economies of cscale,
91
Product differentiation
Defined as providing something unique that is more valuable to customers than the cost of providing it. It is less vulnerable to being overturned by changes in environment
92
Negatives of exessive experience
1. Experience leads redundant knowledge
(firms wont try new, better ideas)
2. Experience lock-ins (exessive experience often leads firms to overlook alternate technoligies/processes
93
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-
94
Main assumptions underlying standard microeconomic theory
- Firms are viewed as holistic entities (a single unified entity)
- Firms are supposed to have a single objective
- There is perfect information
- Behaviour of producers and consumers is described as maximizing behavior
95
Mutual adjustment
Achieves coordination by the simple process of informal communication
96
Direct supervision
In which coordination is achieved by having one person issue orders or instructions to several others whose work interrelates
97
Standardization of work processes
Which achieves coordination by specifying the work processes of people carrying out interrelated tasks
98
Standardization of outputs
Which achieves coordination by specifying the results of different work
99
Standardization of skills
Different peices of work are coordinated by virtue of the related training the workers have received
100
>Standardization of norms
In which ti is the norms determining the work that are controlled, usually for the entire organization, so that everyone functions according to beliefs
101
Machine organization
In this firm all processes and products are standardized
102
Proffesional organization
Firms relying on professional work
103
Diversified organization
This firm specifies the output expected from its divisions and then leaves them considerable autonomy as to how they attain these goals
104
Innovative organizatino
Organizations that rely primarily on remaining innovative in their given market
105
Missionary organizatino
Organisations that rely on a strong sense of shared common values and beliefs
106
Platform organization
An organization that predominantly uses a digital platform as coordinating mechanism
107
contingent claims contract
an agreement on a specification of quality levels and prices that are
dependent on the actual quality levels of next year’s products. The specific terms of the contract are
made contingent on the uncertainty involved
108
The fundamental paradox of information
The value of information can only be realized by revealing it to another party, but such disclosure destroys its value
109
Ecological simulation
A selection process using the average game pay-offs of the various strategies as fitness criteria determines the evolution of the population
110
Anchoring
The tendency rto rely too heavily on one (early) piece of information when making decisions
111
Framing
If you ask someone to make a choice between two alternatives the answer may depend on how you fram the question
112
Mentall accounting
The process whereby people code, categorize and evaluate economic outcomes
113
The endowment effect
The tendency to value goods that we already hold to consume higher than our willingness to pay for these goods before owning the
114
Prospect theory
Prospect theory assumes that losses and gains are valued differently, and thus individuals make decisions based on perceived gains instead of perceived losses. Also known as the "loss-aversion" theory, the general concept is that if two choices are put before an individual, both equal, with one presented in terms of potential gains and the other in terms of possible losses, the former option will be chosen.
115
Four possible strategies toward making rational decisions:
1. Debiasing: training individuals to be aware of decision biases and to reduce or even eliminate these biases and their actual decisions
2. Nudging: Any way of altering peoples behaviour in a predictable way without forbidding any options
3. Encouraging dissent:
4. Routines
116
shirking
When one person puts in less effort than the rest
117
The decision process in four steps:
1. Initiation (generation of proposals for resource utilization and structuring of contracts)
2. Ratification (process culminating in choosing which of the initiatives is to be implemented
3. Implementation (execution of ratified decision)
4. Monitoring (measurement of the performance of decision agents and implementation of rewards
118
Strategy of cost leadership
The firm tries to manufacture and distribute products at the lowest possible unit cost
119
Resource-based view of the firm
Include: Human, financial, tangible and intangible resources
120
A dynamic capability
The capacity of an organization to purposefully create, extend, or modify its resource base
121
Vertical integration
Moving into the production of previous stages or subsequent stages. It is sometimes thought that technological factors determine whether or not two subsequent stages in a production process will be vertically integrated
122
transitivity
if a person, group, or society prefers some choice option x to some choice option y and they also prefer y to z, then they furthermore prefer x to z.
123
quasi-resolution of conflict
instead of resolving conflict, organizations break problems into pieces and farm pieces out to different units.
124
S-C-P
structure-Conduct-performance
125
Tautological
Covering all possibilities
126
Boundaries of a firm
The activities the firm does its self vs those it does through market transactions
127
behavioral uncertainty
When you dont know how someone is going to act
128
Ideal organizations
forms of coordination of transactions that do not use prices to communicate information between the transacting parties.
129
ideal markets
Use prices to communicate information between transacting parties
130
The VRIN network
- Valuable (enables a firm to operate efficiently)
- Rare (difficult to acquire the same resource)
- Inimitable (difficult to replicate)
- Non-substitutable (no substitute resources available)
131
Economies of scope
When the joint production of two goods is less costly than the cost of producing these goods seperately
132
horizotal-multi nationalization
Becoming involved in the same activities in a different country
133
bargaining power of participants depends on
The uniqueness of their contribution
134
Experimential learning
1. Failure experience > success experience
2. ones own experience > someone elses experience
3. Complete experience > partial experience
4. Close experience > distant experience
