Discuss theoretically when contracting costs can be reduced by ICT.
Give an example of an intermediary which has been successful in reducing contracting costs.
This is a straightforward question aimed at testing students’ understanding of the transaction costs theory and its implication in the context of e-business. The answer needs to discuss what contracting costs are and argue how intermediaries can reduce these costs.
Contracting costs are the costs that agents face in discovering the actual relationship between prices and quantities/qualities of goods or services. Contracting costs mainly exist because of uncertainty, bounded rationality and opportunistic behaviour. These factors make it difficult to know what the actual relationships are between prices and qualities/quantities.
Intermediaries, especially in the digital economy, can be very successful in helping agents to overcome the frictions which make it difficult to discover the relationships between prices and quantities/qualities of goods and services.
A good example of an intermediary which is successful in reducing contracting costs is TripAdvisor. A good answer will discuss contracting costs and will provide a sound example of an intermediary which reduces them. An excellent answer will articulate the argument and will discuss not only how, but also why, such an intermediary has been successful in achieving this goal
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