Reference no: EM133031182

Transaction costs are the total of all costs that a buyer and seller incur as they gather information and negotiate a purchase-and-sale transaction. A significant component of transaction costs can be the investment a seller makes in equipment or in the hiring of skilled employees to supply the product or service to the buyer. Figure 1-6 illustrates a market form of economic organization for a sweater dealer.

The practice of an existing firm replacing one or more of its supplier markets with its own hierarchical structure for creating the supplied product is called vertical integration. Figure 1-7 illustrates a hierarchal form of economic organization for a sweater dealer. A strategic business unit (SBU) is one particular combination of product, distribution channel, and customer type.

Businesses and individuals can use electronic commerce to reduce transaction costs by improving the flow of information and increasing the coordination of actions.

Strategic partners are entities that come together as a team for a specific project or activity. Network organizations are particularly well suited to technology industries that are information intensive. Figure 1-8 reveals a network organization. As more people or organizations participate in a network, the value of the network to each participant increases. This increase in value is called a network effect. Electronic commerce can make networks, which rely extensively on information sharing, much easier to construct and maintain. It is likely that these network forms of organizing commerce will become predominant in the near future.

Discussion Questions

1. Explain how electronic commerce can make networks much easier to construct and maintain.

2. Explain why a hierarchical organization always has a pyramid-shaped structure.

3. Why is most business activity conducted today in hierarchical organizations rather than in markets?

4. Discuss the importance of transaction costs.

5. How are businesses harnessing the power of network effects during the COVID-19 pandemic?