Parties and transactions Every transaction involves various parties Buyers and sellers Third parties Special cases of buyer or sellers o Brokers bring buyers and sellers together o Infrastructure providers provide service or goods that improve the efficiency of transactions Transaction exchange of goods and services among parties Transactions can be of many types o Legal or not illegal is more risky o Involve money or not Barter no money exchange traders Purchase money When its being delivered o Striking the transaction and completing it o Spot transaction struck and delivery occurs in a continuous manner asap or within a few days happens at the same time Ordering food buying clothes o Future transaction delivery is in the future separated in time Buying a new car 2 months More risky delivery may never happen Domestic transaction same country or international transaction different countries more risk o Complications law language custom currency Transaction between firm and a party in its environment or between one part of the firm and another of the same firm o Market transactions firm and party in environment o Transfer transactions within same firm Price is lower than market price but higher than cost of production transfer pricing problem Produce no revenue for the firm Knowledge of the type of transaction tells us nothing about other type on other dimensions independent dimensions What is the primary good or service being exchanged o Finished goods transactions shirt from AE o Intermediate goods transactions steel to aircraft maker o Raw material transactions paint o Labor transactions time skills effort of worker o Real property transactions land equipment buildings o Intellectual property transactions knowledge patents copyrights trade secrets o Capital transactions loans or stock o Distribution channel transactions paying someone to sell products o Professional service transactions pay outside expert o Garbage transactions haul away trash Input transactions focal firm is the buyer Output transactions which it is the seller o Firm must engage in both types of transactions OSH Markets and regulatory mechanisms Transactions to markets A market can be a physical place but many transactions don t happen in a single place A market is the arena within which transactions occur Making markets orderly Price system or market system o If all sellers know the prices of other companies their own technology and costs and seek max profits and o If all buyers know the prices charged by all producers know their preferences and seek to gain max preferences and o If prices are those which supply demand for all goods and services then there is no other way of allocating goods and services given the resources and technology available that buyers would unanimously prefer o Sellers can maximize profits and buyers can maximize preferences just by pursuing their own interests Law of supply and demand Central planning not needed Capitalist systems Economic model we assume firms have multiple goals and maximization doesn t usually occur o Assumption that price system gives seller too much power and a central planning system gov needs to regulate price and distribution and types of products socialists If market system fails gov can intervene Regulatory mechanisms gov agency FDA o State national international world trade org o Human trusts No out of pocket costs easy to exploit Orderliness of markets o Continuum of regulatory mechanisms o Markets usually rely on some combination of the price system and regulatory mechanisms to maintain orderliness Orderly means that prices product attributes and product availability are stable Why does orderliness occur o If all the assumptions of price theory are met the firm is in perfect competition then One generic product attributes are stable Supply demand enough product available Price converges to an equilibrium price price is o All of this hinges on parties having Identical public information sellers and price Unique private information preferences and stable budgets All relevant info is symmetric o But price theory also assumes each party is self interested Buyers want to pay less sellers want more profit o Each party has incentive to get info that will give them an advantage in the market asymmetric info Gaining this will get them a better deal Get the info by Naturally occurring situations steal the info generic knowledge patterns collect info and analyze Online patterns of purchases DATA Most markets are relatively stable MINING Competitors Price o Something else must contribute to market stability other than price theory o Orderliness of markets price system regulatory systems Any party on the same side of the transaction as you in each market you are in is your competitor in that market o Seller other sellers in that market are your o Buyer other buyers in that market are your competitors competitors o Broker other brokers of the same service in that market are your competitors o Rival means competitor on your sell side Competitor implies a party who is your rival in one market may be your ally in another o Ford and Mazda are competitors cars but have similar designs The companies are allies in the intellectual property market design Prices paid by buyers are higher in monopolies than in perfect comp Prices reflects supply demand attributes of the product and time Price is influenced by me and actions of the other sellers and buyers The higher the price the more a seller may want to produce When production supply increases prices fall The lower the price the more buyers may want to purchase But when purchases demand increases prices go up Idealized markets represent certain special interesting conditions Perfect competition monopolistic competition oligopoly and monopoly Pricing in perfect competition Differ in 2 ways o Assumptions about of products and size of buyers and sellers and the nature of entry barriers Size is measured by market share for producers portion of total market sold by one producer or purchase share portion of total market purchased by one buyer Info available to buyers and sellers All sellers know prices of other producers their own technology own cost and seek max profits All buyers know the price their preferences and seek to gain a max set of of preferences given price ad income Time determination of price in future markets is complex Attribute assume one product product has identical attributes or multiple products are