Now's the time
That we need to share
So find yourself
We're on our way back home
--Supertramp
Nice discussion of Microsoft's (MSFT) recent purchase of Nokia (NOK) assets in the context of transaction costs and contracting, including some snippets from Ronald Coase.
Transaction costs are costs associated with using the market pricing mechanism. Examples include negotiations, drawing up of contracts, and arrangements for settling disputes.
Coase's key contribution in the 1930s was his observation that these transaction costs are often greater than zero and significant. This may seem obvious to us today but it challenged the zero transaction cost mindset that dominated economics at the time.
As transaction costs escalate, it is increasingly tempting to take the associated exchanges 'off the market' and put them into a managed hierarchy anticipated to reduce the cost of exchange.
The article cites file sharing difficulties in one particular MSFT/NOK alliance that likely was part of the motivation for MSFT's buyout. By exerting more control over the transaction via direct ownership, MSFT thinks that it will be able to reduce the hangups that made trades less efficient.
Transaction cost theory helps explain why buyouts, mergers, and vertical integration happen.
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The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.
~Friedrich Hayek
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