Critically determine and describe the application of the theory of market-making costs is to market for information. Evaluate the ways by which an entrepreneur can exploit commercial information. The firm can own resources on its own behalf, and is in turn owned by other people – Illustrate.
The theory of market-making costs is rather innovative because it used to be neglected in the prior scientific works and did not attract much attention. However, according to the literary review of Loasby (1999) giving a proper account for the discussed theory, it was considered by such economists as Chamberlin, Coase, Marshall, Casson, Penrose etc. It pertains to the fact that the key person who benefits from the creation of the market is the one who invests. So the task of the creator is to attract investors and to expand the market to the profit-bringing scale:
“A market is a kind of public good. But who will have sufficient inducement to invest in a public good? Such investment will appear attractive only to someone who expects to undertake a great many transactions, and who values the private benefit above private costs, or who expects to be able to charge traders for the transactions which they undertake” (Loasby, 1999).
The entrepreneur can exploit commercial information in a number of ways that are sure to bring him or her profit – this may be the information on the changing consumer needs, the coming currency exchange rates, the innovation planned for launching by competitors etc. Anyway, any relevant commercial information may be utilized by the entrepreneur by making constructive decisions as to the working process, production process or some other aspects of the firm’s activity. For instance, the entrepreneur may cancel launching the production of a new product or the introduction of a new series of services if the commercial information witnesses lack of demand in the given sphere or too fierce and advantageous competition from the side of other firms acting in the given market.
The firm may really possess a certain amount of resources on its behalf because every firm should possess them in order to exist and function in the market successfully. This may be a set of contracts, human resources capital, reputation and a set of tools for acting in the market. However, there is always another owner who is actually the possessor of the firm, so sometimes his activities may be not directly connected with the line of activities of the firm. The owner’s main function is to guide the firm’s activity in the direction individually interesting for him or her. The owner may even not take part in the firm’s activity on the everyday basis; however, the owner is the main influential person in the firm as he or she is the creator, sponsor, financial mover of the organization.
Critically analyze and describe the process of transformation of firm as a Market-Making Organization with the considerable amount of information. Transaction costs are costs incurred in overcoming obstacles to trade. List the factors affecting the market-making costs. There are strategies of a general nature for reducing market-making costs in a given market. Critically analyze and describe the strategies used in reducing market-making costs. Summarize the strategies which are specifically designed to reduce the risk of default or at least to eliminate any exaggerated perception of the risk by the parties involved.
The transformation of a firm with the help of a market-making organization is closely connected with processing a huge amount of information. Thus, it is possible to sum up the functions of a market-making organization as a tool for efficient processing of information and establishing a prompt information flow, which is crucial in the context of market-making:
“These firms act as specialized intermediaries. Their principal function is to reduce obstacles to trade by improving information flow. The efficient market-making firm overcomes these obstacles with minimum transaction cost” (Casson, 1982).
Market-making costs are a vague and changeable factor, so they should be constantly taken proper care of in case the entrepreneur wants his or her business to be successful. There is a set of factors that affect the market-making costs. The first factor is the necessity for memorizing commitments, i.e. making business transactions quickly in order to keep to timely promises and arrangements. If the parties fail to do this on time, then they cannot be confident in the final result’s correspondence to the preliminary arrangement, since the market is very changeable and the conditions vary every second (Casson, 1982).
“Memorizing commitments ties up mental resources (or filing space) and so has a positive opportunity cost. The cost is greater the longer is the time span involved. In this way a time lag in completion of a contract increases memory costs” (Casson, 1982).
Costs may be also affected by a partnering company’s bankruptcy, no matter whether it happens in this particular market or in another one – the law of bankruptcy cancels many obligations for a firm, thus creating a real danger for another, partnering firm (Casson, 1982).
Evaluation of quality and quality control may also become an important factor affecting market-making costs, depending on the type of the marketed product. What an entrepreneur has to seriously think about is the synchronization of supply and payment – once this procedure is completed, there is a much higher probability of reducing market-making costs:
“A contract may take a long time to complete, and possibly involve many installments as well; but so long as payment and supply are synchronized on all installments throughout the contract period, the opportunity to affect a unilateral transfer does not exist” (Casson, 1982).
As for strategies for reducing the market-making costs, it is relevant to discuss such ones as bulk trading and repeat-trading. Bulk trading has a set of advantages that may be successfully used by an entrepreneur. These are: market-making costs being stale and fixed, thus being minimized under the condition of infrequent trades; negotiation costs being fewer with infrequent trades; advantage gained from reduced transportation costs (Casson, 1982).
Repeat-trading also has a set of advantages such as reduced costs for renewing contracts as compared to concluding new contracts, and partnering experience being beneficial for both sides renewing their business relations (Casson, 1982). In the discussion of strategies to protect the firm from default acquisition of a sanction should be mentioned. It is a powerful tool of protection against default and reducing its probability: the firm may publicize the default thus destroying the company’s reputation, and may have a legal basis for obtaining material compensation (Casson, 1982).
Critically analyze the criteria that determine whether the market should be eliminated or preserved. Determine the strategies for reducing market-making costs in the aggregate by reducing the number of different markets. Critically analyze and illustrate the role of the entrepreneur in promoting the development of a multi-purpose good. Critically analyze and describe the process of internalization of labor services through the employment contract. Self-employment is, on the face of it, a very attractive way of bypassing labor market imperfections – Elucidate.
Reduction of market-making costs also involves the process of reducing the number of markets – it is logical, taking into consideration the fact that activity in every market takes up separate costs, thus increasing the expenses. So there is a set of market-reducing strategies that are focused on making a productive decision based on criteria of complements and substitutes.
“Packaging complements works best when the constituent goods are complementary in both supply and demand. The main application of the principle is to durable assets. A durable asset may be regarded as the equivalent of a bundle of dated services. Each service consists of the right to utilize the asset at a particular time” (Casson, 1982).
The problem that is faced by an entrepreneur while implementing the discussed strategy is the necessity to operate several markets and to spend multiple market-making costs. This problem is solved the following way: the whole package of complements is assigned to the durable asset, thus enabling it to be sold in a spot market (Casson, 1982).
The second strategy pertains to packaging substitutes, which is considered to be a highly efficient way to reduce market-making costs:
“It works best when the constituent goods are substitutes in both supply and demand. The embodiment of the principle is the multi-purpose good: the good is capable of being put to a number of alternative uses (so that the uses are substitutes in supply) and it is unlikely that more than one of these uses will be required at any one time (so that the uses are substitutes in demand)” (Casson, 1982).
Application of this strategy requires profound considerations on the point where the demand will be higher and the volumes of trade will be tenser. For this reason the choice is usually made in the benefit of multi-purpose goods rather than specific goods to ensure more optimal and profitable trade (Casson, 1982).
Production actually constitutes transformation of material through usage of multi-purpose goods. Labor, for example, is one of the most common multi-purpose goods. The firm’s role is to control these goods and utilize them through operating them for its own profit.
“An important feature of the firm is that it brings multi-purpose goods under common control. Co-ordination of the use of these goods is effected through internal markets (or planning) instead of through arm’s length contracts in external markets. External markets are still needed, however, in order to set up the internal markets” (Storey, 2000).
So firms operate multi-purpose goods through internal markets but extract them from external ones. An entrepreneur’s key role is to determine the type of multi-purpose goods needed and to make strategic effort to obtain and utilize them.
The employment contract is a good means of internalization of labor because of the set of obligations it stipulates for both parties: the employer on the one hand and the employee on the other hand. This way the employee obtains certain confidence and stability given to him by a regular workplace and secured by the national legislation (it is important to note that the employment contract is a legal document, so in case of some controversy both of the sides may turn to an authoritative body to solve the issue, so the right side will always get what is due for him or her). The employer, in his or her turn, is confident that the employee will work for the benefit of the firm, getting all possible remuneration under the terms of the contract, and ensures this employee’s presence in the firm for the period stipulated for a certain period of time. If the worker proves to be a profitable acquirement for the firm, it is the task of the employer to leave this member of the staff inside the firm for as long as possible, and internalize his labor this way, ensuring that he or she will not pass the knowledge acquired in his or her firm to another organization.
Self-employment is attractive for entrepreneurs because of self-reliance – the changing market, growing competition and fierce struggle for a larger share in the market make existence of every particular organization much more difficult and eliminate the entrepreneur’s possibility to rely on other people. Commercial intelligence is highly developed, there are many challenges on the way to success, so many entrepreneurs choose the way of self-employment to reduce risks of failure and to ensure the success of the undertaking they have planned. In any case, if they are self-employed, they have the only person they are accountable to – themselves.
Justify whether an entrepreneur would be solely responsible for market-making activities. Critically analyze and estimate the importance of the package price of the marketing service. Evaluate the extent of the markets in these services should be internalized by the market maker. The producer and the market makers are two distinct people, connected by arm’s-length trade in which the producer sells the product to the market maker, who assumes responsibility for its distribution to the final users – Evaluate. Critically analyze and explain the role of producer-entrepreneur and retailer-entrepreneur.
The entrepreneur should be solely responsible for market-making activities because they constitute an essential part of the firm’s functioning and determine its success in the particular market – “market-making activities encompass contact-making and the specifications, negotiation, monitoring and enforcement of contracts” (Enderwick, 1985). However, it is not usually so because a single person cannot handle such amount of work and process enormous amounts of information relevant for business activities. The share of work done by the entrepreneur depends on the size of the firm and the volume of activities it undertakes.
The package price in the context of discussion of marketing services is extremely important, as it is in every other business sphere, since it provides a set of additional opportunities for those ordering a package of services. It is the rule of the market that package prices allow the customers to obtain a broader range of services necessary for making a market at a lower price and with higher convenience:
“packages have become increasingly popular over the years. They are attractive because they benefit both the customer and participating businesses; packaging provides convenience and value to the customer, and added revenue for participating businesses” (Marketing a Bed and Breakfast, 2009).
Thus, it is clear that the benefit of packaging prices is evident for every party, and in case with market-making, when a huge set of institutions, intermediaries and complementary organizations are enacted to achieve productive results, packaging seems a reasonable way out for the firm wishing to reduce capital and time expenditures.
The extent of internalizing markets depends on the way market-making activities are organized within a firm. The common tendency that has been noticed by economists is that internalization is the result of negative, insufficient organization, so the high extent of internalization signals about the necessity for improvement: “the underdevelopment of markets and high costs of conducting external transactions in market-making activities encourage internalization” (Enderwick, 1985).
It is true that the producer bears much less responsibility for the distribution of the product, which is the entire responsibility of the market maker. The task of the producer is much more limited, since production is the sole action performed by this body. The main source of profit is the net cost of material or product produced by the manufacturer who then sells it to the market maker. The latter, in his or her turn, obtains income from sales, thus it is their main responsibility to perform distribution in the carefully planned and organized way to accomplish their role in the market. However, in case the sales fail and the product turns out to be unprofitable, the market maker may tailor his or her activity another way and partner with another producer to gain profit. Thus, it is the responsibility of the manufacturer to make a high-quality product which will be attractive in the market and will enable the market-maker to sell it.
In the relations of producer-entrepreneur and retailer-entrepreneur the role of the entrepreneur is the one of an intermediary. The entrepreneur represents the connecting link in the value chain of the product, extracting the necessary good from the external market and searching for retailers who will be interested in distributing it. Through adding the value to the net costs spent for obtaining the good from the producer entrepreneur fulfills his or her main task in the market and passes the good further through the value chain after receiving his or her profit from it.
Devise the four main functions of the market for the entrepreneur which allocates judgmental decisions to entrepreneurs. Elaborate the process of determining whether the decisions are judgmental or not. There is no objective test of entrepreneurial ability which can guarantee a high degree of accuracy, and there is unlikely to be one in the foreseeable future. Summarize the process of identifying an entrepreneur. The matching of decisions to entrepreneurs exhibits another special feature of the market for entrepreneur, namely the extreme heterogeneity of the commodity that is traded – Elucidate. Even a person with entrepreneurial ability cannot guarantee that his judgment will always turn out completely successful – Summarize.
There have been many debates over what unified and systematized scale to invent in order to efficiently identify the concept of entrepreneurship. It turned out to be extremely hard to do this because of the multifaceted essence of entrepreneurship and many aspects the concept includes. However, it is possible to use the term of Krueger (2002) who states that the entrepreneur is “someone who specializes in taking fundamental decisions about the coordination of scarce resources”. From this quotation it follows that the entrepreneur should first of all be an individual and not a group, in other way it goes beyond the limits of the entrepreneurship theory, and should be a qualified specialist who is entitled for working in the market successfully. The concept of an entrepreneur does not necessarily demand legal qualifications but involves individual, personal characteristics that can make up a successful entrepreneur understanding the market and being able to conduct business affairs. Nonetheless, the concept of a judgmental decision is more important in the present discussion.
“A judgmental decision is one where different individuals, sharing the same objectives and acting under similar circumstances, would make different decisions. The difference arises because they have different perceptions of the situation arising from different access to information, or different interpretation of it” (Krueger, 2002).
However, it is necessary to admit that despite the definition of an entrepreneur as a person entitled to make judgmental decisions there is no guarantee that the decision will be successful. Fierce competition in the changing market affects the success of an entrepreneurial undertaking heavily, and the turbulence of market conditions changing the situation every second make the correct decision-making extremely hard and unexpected. For this reason the entrepreneur is often called a person acting under the conditions of total uncertainty, so that only charismatic qualities, professionalism and consistency may guarantee the success at least to a certain extent.
An entrepreneur is a person who is entitled to making judgmental decisions in the process of conducting business affairs. Thus, the market in which he acts tailors his skills in order to perform the following set of functions that are influenced by his ability for judgmental decision-making: organization/coordination of production; risk of uncertainty bearing; innovations; and creation/exploitation of profit opportunities (Karayiannis, 2009). This is why the functions of entrepreneur in the market are highly diverse and responsible. Decision-making under the turbulent, changing market conditions is the clue to success of an entrepreneur, so in order to perform his or her functions successfully the entrepreneur should take the implications of judgmental decision-making into consideration.
It is true that one of the characteristic features of an entrepreneur is to act under the conditions of extreme heterogeneity of the commodity that is traded – here the entrepreneur has to take into consideration a huge amount of information concerning the specific demands of consumers, partners, producers and retailers. He or she has to consider financial, legal, business aspects of the commodity that is traded, has to take into account its quality, type and structure, peculiarities of utilization and environmental safety etc. Thus, entrepreneurship activity appears to be highly diverse and heavily depends on the traded product.
The entrepreneurship concept is very varied and multifaceted since it includes a great number of characteristics of an individual undertaking the entrepreneurship activity, their functions and tasks to be undertaken in the process of conducting business affairs. An entrepreneur has to take into consideration the turbulent conditions of the market, changing needs of customers, correlate their activities with producers and retailers, sustain an adequate level of internalization of market through a thoroughly organized structure of market-making activities.
Market-making costs are an issue of central importance since they determine profitability of the firm. The theory of market-making costs is innovative and has only recently become the focus of economists’ attention. From the point of view of this theory, the main task of an entrepreneur is to expand the market and make it the source of financial profit. For this purpose the entrepreneur should exploit commercial information in a number of ways that may help him or her achieve profit and multiply revenues.
There is a substantial difference between the sources that are the direct property of a firm and the firm constituting property by itself. Actually, they are absolutely different, as the firm may possess a certain set of resources for conducting its business activities in contrast to the owner of the firm who just receives revenues because of the firm’s possession.
The importance of the firm’s transition with the help of a market-making organization is hard to exaggerate because a market-making organization handles processing of huge amounts of information and acts as an intermediary in the firm’s functioning at the market. With the help of such organizations a firm may successfully reduce market-making costs. Other strategies of reducing them are quality control, synchronization of supply and payment, memorizing commitments. Other strategies that should be taken into account while considering reduction of market-making costs are bulk trading, repeat-trading and acquisition of sanctions.
The process of reducing market-making costs also includes scanning the market for consistency and making decisions on whether some markets should be eliminated or entered. Here the main criteria for producing the judgment are based on complements and substitutes. Multi-purpose goods are the focus of attention for entrepreneurs as well – with the help of processing them an entrepreneur conducts his or her business activity.
Employment issues are thoroughly thought over when conducting entrepreneur activities. An entrepreneur should generate a set of ways to ensure the employees’ commitment to their common undertaking. In the discussed sphere self-employment is surely a more profitable way of conducting business affairs as it is based on self-reliance. It is true that all market-making activities should be conducted by the entrepreneur personally – in other way the risk increases enormously.
Pricing and relations with retailers and producers are another matter of concern for an entrepreneur. Here package prices represent a good solution because of their profitability for the firm, and relations between the three links in the value chain may look the following way: the producer is the initial link who nevertheless bears less responsibility (namely, responsibility for distribution), an entrepreneur is the medium link, and the retailer is the final link distributing the product to consumers.
Despite the fact that there is still a dispute over how define an entrepreneur, a more or less unified definition includes the characteristics of making judgmental decisions. A judgmental decision is the one that causes actions and is the final one. Nevertheless, this decision is surely not guaranteed to be correct, which is always a risk for every entrepreneur.
References
- Casson, M. (1982). The Entrepreneur. Rowman & Littlefield, 418 pp.
- Enderwick, P. (1985). Multinational Business & Labor. Routledge, 234 pp.
- Karayiannis, A.D. (2009). A Synthesized Theory of Entrepreneurship. University of Piraeus. Department of Economics.
- Krueger, N.F. (2002). Entrepreneurship: critical perspectives on business and management. Taylor & Francis, 496 pp.
- Loasby, B.J. (1999). Knowledge, institutions, and evolution in economics. Routledge, 168 pp.
- Marketing a Bed and Breakfast (2009). New Mexico State University.
- Storey, D.J. (2000). Small business: critical perspectives on business and management. Taylor & Francis, 1539 pp.