AbstractUber is one of the latest advancement of technology in the transportation department. It uses and App, which can easily be downloaded from the Google Play store and installed in mobile phones and any other computer devises that uses an Android. Since its invention, the company has provided many employment opportunities to many drivers in the United States and across the globe. Just like any other business firm that uses technology to maximize its operations, Uber faces stiff competition from other transportation sectors and thus, has numerous challenges in terms of its daily operations. This calls for an in-depth knowledge and a careful handling of its operations. In this case, the paper analyses transaction costs in order to provide the company with as much information as possible regarding how it influences the company.
Key words: transaction costs, knowledge, transport
Ronald Coase is credited with inventing an approach of transaction cost to a theory firms. He defined a transaction cost as the cost incurred when providing for some services and goods in the market instead of providing it in the confines of the firm. Alternatively, in the transportion industry, transaction cost is an expense that is incurred in conducting an exchange of economic value. There exist numerous various types of transaction cost. Information and search cost, for example, are the costs that are incurred in assessing that the needed services or goods are accessible in the market and determining the salesman with the most favorable price. In this precept, this paper will analysise transaction cost as a knowledge management tool affecting the ecommerce process in Uber company.
Understanding the Terms
Enforcement and policing costs include those aimed at ensuring ensuring the other party does not depart from the strict provisions of the contract, and instituting proper action if the breaching of the contract happens (Nistal, 2016). Costs of bargaining are those that are needed to arrive at an agreeable contract with the transaction partner, and those costs that are incurred when drafting a contract. Theorists of transaction cost argue that the cumulative costs that a firm like Uber incurs can be classified into two; production costs and transaction costs (Wilhelm & Tsotsis, 2017). Production costs according to them will involve all the primary or physical processes that are required for creation and distribution of services and goods that are subject to production. Whereas; transaction costs which are also known as coordination costs include the cost of the aggregate information of processing that is required in a combination of machines and human labor that perform the necessary processing (Wilhelm & Tsotsis, 2017).
Transaction cost theory has increasingly become a vital anchor for assessing the broad range of organizational and strategic issues of substantial importance to firms (Wilhelm & Tsotsis, 2017). Specifically, the theory of transaction cost has been used in making decisions on vertical integration, reasoning factors effecting acquisitions, studying firms’ boundaries and numerous hybrid forms of governance. For Uber, which is one of the moder transport companies, transaction costs are the explanation for its structural arrangements and internalization that is needed to boost the chances of succe (Wilhelm & Tsotsis, 2017). It is, therefore, a foregone conclusion that the transaction cost approach has acquired the status of a pervasive theory in the management of the new modern firm.
Transaction Cost in Uber
A question that we seek to answer is that of how transactions in modern economies are organized as they are presently through the use of transactional economic approach. A quick response is that when there is an elaborate failure in the market for intermediate inputs, the activities Uber are internalized inside the firm (The Trials of Uber, 2015). Transaction cost approach, therefore, argues that there exist costs to carry out transactions in the market. The cost of these transactions can be reduced through contrivances apart from those of markets. To be more precise, there exist costs to safeguarding any transaction or exchange and to drafting negotiation that is considered an impediment to transacting smoothly “friction.” The transaction cost approach claims that these expenses that drive the firm’s economy are as vital or even more crucial than the costs of production (Uber, 2017).
Assumptions Of The Transaction Cost Approach and its Implications On Governance
For the theory of a firm to stand when using the transaction based approach; significant assumptions about characteristics of the environment and human behavior have to be made. Such assumptions explain the reasons why Uber is more effective at organizing transactions than markets and why it may be faced with capital expenses for transactions based on markets (Internal Survey, 2014). One of the assumptions is the opportunism with guile (Nistal, 2016). Here; firms make an assumption that people may take part in actions that are both overtly or subtly deceitful ex-post and ex-ante to making contract agreements. In the lack of this assumption; enforcement of contracts would be costless, and there would be no rational explanation; besides the market, for other genres of economic firms (The Sharing Economy, 2015).
Another assumption is that of uncertainity. It is a direct opposite of the neoclassical view of perfect information. The previous assumption holds that information about the future, current or the past is not known perfectly due to various causes (Wilhelm & Tsotsis, 2017). If at all bounded rationality and opportunism did not exist, the general rule would prevail, and uncertainty would not be a problem. The difficulty comes from the inability to know the future state or have knowledge of individuals that are more prone to act in an opportunistic manner (Nistal, 2016). The primary implication that the transaction cost approach has on the governance of the firm is that the most effective and efficient structure of governance for managing economic exchanges is pegged on numerous traits of the transaction itself. For example, the market will fundamentally nonparticular transactions of both recurrent and the occasional making of contracts (Scholar, 2017; Shneider, 2016).
The case study of Uber is a pure textbook illustration of the transaction based approach to the theory of a firm. Uber has a plan to operate thousands of drivers that are independent of a limited number core of human personnel that manages those employees. The existence of skyrocketing transaction costs led to the emergence of management as we know it and firm as we understand it. If the cost of the transaction of exchanging value in the society at large drastically shoots down as is the modern situation, the logic and form of organizational and economic entities by necessity need to change (Wilhelm & Tsotsis, 2017). The ideal firm, therefore, is today agile, small with a large network. Given the above; the mainstream traditional firm becomes the expensive alternative.
In numerous ways, Uber represents a 21st-century firm model. In carrying out its operations, the firm parent markets brands the product, marks known standards of its production and then receives a percentage revenue and a licensing fee from each of its franchises (Blackstone et al., 2015). Although the hotel industry has different details from the taxi industry, they apply similar dynamics. Like other transportaion firms, Uber utilizes technology to ensure that the excess capacity available in locations that in the real sense are not properly served (Dillet, 2017).
Traditional firms will evolve into massive networks if the transaction costs are lowered. Therefore, firms should labor to reduce the barriers to entry for both customers and suppliers. Networking effectively aggregates the suppliers, raising both the total number of suppliers and the cumulative number of products available (Aitharaju et al., 2016). In return, the networks develop into a reproduction ground for novel types of intermediaries. Therefore, firms should focus on developing systems that will offer support to all the possible sizes of suppliers. By lowering the transaction costs, it becomes possible to provide products at lower prices to the market and consequently increase its demand (Hall & Krueger, 2016). During the opening of the market to a large supply chain, the firm ought to heavily invest in over time, reputation and sophisticated curation (Aitharaju et al., 2016).
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