Processes, Complexities and Ecological Similarities
Chapter 14: Business partnerships, cooperation and the enhancement of economic performance
The previous chapter considered reasons why firms exist and discussed the extent to which market- like mechanisms (transfer prices) might profitably be used to manage a vertically integrated firm. The analysis considered the economic performance of such a firm when each of its divisions is a profit centre with the salaries of the managers of each division positively linked to the imputed profit of their division. It was observed that such a managerial arrangement is subject to ‘market’ failures. Causes can include the existence of market transaction costs (the straddle case), externalities (or synergies) between divisions and inadequate knowledge about the relationships needed to determine optimal transfer prices. As observed by Richardson (1998a, pp. 52–3), market failure is also liable to occur within the firm if one of its division or a profit centre experiences decreasing per- unit costs of production. He (Richardson, 1998a, p. 52) observes that ‘paradoxically the creation of profit centres within a business may at once be necessary for and incompatible with the maximisation of profit for a business as a whole.’
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