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An approach to understanding how the number of firms in an industry, and the nature of exchanges between such firms, is determined. It is based on the fundamental proposition \'that the economic institutions of capitalism have the main purpose and effect of economizing on transaction costs\' (Williamson, 1985, p. 17). To this end, a firm may judge it cheaper to produce a commodity within its internal organization (or \'hierarchy\'), perhaps to exploit internal economies of scope or to reap internal economies of scale. Alternatively, the firm may judge it cheaper to acquire the same commodity through an external transaction (e.g. market purchase, subcontracting), the cost of making this transaction perhaps having been reduced by the clustering of suppliers near to the firm. This type of analysis illuminates one of the forces said to propel the agglomeration of productive activities in urban centres. (See location theory; production complex; transaction costs.)Â (MSG)
Reference Williamson, O.E. 1985: The economic institutions of capitalism. New York: The Free Press. |
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