I.

PROBLEM-SOLVING AND DECISION-MAKING

A. Using Economics to Solve Problems

Economics, at its core, is the study of how to evaluate alternatives and make better
choices. It develops critical-thinking and problem-solving skills to make good decisions. It
develops analytical skills to examine data to support good decisions. Most resources are only
available in limited quantities at any point in time: in other words they are scarce. The ‘economic
problem’ centers on how to allocate these scarce resources in ways that do not leave a trail of
missed opportunities for doing something better with them. Ways of addressing all of these
problems of choice – and many more – are the domain of business economics. The economic
analysis of choice begins with a very simple proposition: everything has an opportunity cost.
Economics offers powerful tools for problem-solving across various domains. According to the
American Economics Association (AEA), economics can be defined in a few different ways. It’s
the study of scarcity, the study of how people use resources and respond to incentives, or the
study of decision-making. It often involves topics like wealth and finance, but it’s not all about
money. Economics is a broad discipline that helps us understand historical trends, interpret
today’s headlines, and make predictions about the coming years. Economics provides the
primary framework for public policy analysis. The major equips people to understand the
fundamental policy issues that shape market and social outcomes. An economist understands the
immediate issues like trade-offs, benefits versus costs, market failure, public finance, but also
understands the broader issues of generational impacts, welfare impacts, and inequality.
Economics is not primarily a collection of facts to be memorized, though there are plenty of
important concepts to be learned. Instead, economics is better thought of as a collection of
questions to be answered or puzzles to be worked out. Most important, economics provides the
tools to work out those puzzles.

Economics is the study of how humans make decisions in the face of scarcity. These
can be individual decisions, family decisions, business decisions or societal decisions. If you
look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants
for goods, services and resources exceed what is available. Resources, such as labor, tools, land,
and raw materials are necessary to produce the goods and services we want but they exist in
limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24
hours in the day to try to acquire the goods they want. At any point in time, there is only a finite
amount of resources available. Economics seeks to solve the problem of scarcity, which is when
human wants for goods and services exceed the available supply. A modern economy displays a
division of labor, in which people earn income by specializing in what they produce and then use
that income to purchase the products they need or want.

Managerial economics employs a problem-based approach to identify and rectify

business mistakes, enhancing profitability. Economic experiments provide controlled
environments for hypothesis testing and problem-solving, although they have both advantages
and limitations. The concept of "solution economy" has emerged, emphasizing the importance of
problem-solving skills for economic differentiation and development (Buheji, 2019). Solution
economy, is a term developed by Eggers and Macmillan (2013 a) to solve the social problems
from a multidisciplinary perspective which brings together different background practitioners
from businesses, governments, philanthropy and social enterprises to tackle holistically a socio-
economic challenge or problem that would serve many stakeholders or beneficiaries. With
problem-solving and solutions economy we could help to open up services that meet the citizens’
choice, thus shifting the focus from results to the outcome. This help to thrive the socio-
economic development efforts of any community. Visualizing the economics of problem-solving
help governments to provide room for creativity and differentiate their capacity in the delivery of
social outcome.

The application of economic principles plays a crucial role in addressing real-world

issues such as poverty, inequality, and unemployment. Economic principles emphasize justice,
togetherness, and the responsible management of resources, which can significantly mitigate
poverty and unemployment by promoting equitable income distribution through mechanisms and
community support. Similarly, the integration of justice into socioeconomic policies can
enhance sustainability and ensure that the needs of the most disadvantaged are prioritized,
thereby reducing inequality and unemployment. Furthermore, the evolving methodologies in
measuring economic inequality and poverty provide policymakers with evidence-based tools to
understand and address these issues effectively. However, the complexity of poverty and
inequality, influenced by globalization and varying geographical contexts, necessitates a
multifaceted approach that combines these economic principles with interdisciplinary strategies
to achieve lasting solutions. Thus, a comprehensive application of economic theories can lead to
more effective interventions in these persistent societal challenges.

B. Problem Solving Principle

Problem-solving in economic organizations encompasses various activities, including
conceptualizing, designing, and implementing solutions to technological and organizational
challenges. To solve a problem, you have to figure out what’s wrong, and then you have to
figure out how to fix it. Problem-solving principles in economics encompass various
methodologies that address economic challenges through systematic analysis and innovative
strategies. These principles are foundational in both theoretical and practical applications,
guiding decision-making processes across different economic contexts. Managerial economics
applies problem-solving techniques to real-life business scenarios, guiding managers through
complex decision-making processes. This approach integrates various economic theories and
case studies to facilitate understanding and application. You’d begin by determining whether
the money involved was too high at the time it was made, not just in retrospect. Next, if it was
too high at the time it was made, you’d have to figure out why the senior managers overbid and
find ways to make sure they don’t do it again. Both steps require that you predict how people
are likely to behave in different circumstances. The one thing that unites economists is their use
of the rational-actor paradigm to predict behavior. Simply put, this paradigm says that people
act rationally, optimally, and self-interestedly. The paradigm not only helps you figure out why
people behave the way they do but also suggests how to motivate them to change. To change
behavior, you have to change people’s self-interests; you can do that by changing incentives.

In general, rational, self-interested actors make mistakes for one of two reasons.
Either they do not have enough information to make good decisions, or they lack incentives to do
so. Accordingly, when you’re using the rational-actor paradigm to find the cause of a problem,
you need to ask only three questions:
 Who is making the bad decision?
 Does the decision maker have enough information to make a good decision?
 Does the decision maker have the incentives to make a good decision?

Answers to these three questions will immediately suggest ways to fix the problem by:
 letting someone else make the decision,
 giving more information to the decision maker, or
 changing the decision makers’ incentives

It is possible to identify three main management principles that emerge from

the preceding discussion of production theory. These are all key points in terms of decision-
making.
1. Planning
The implication as far as planning is concerned is that the firm must ensure that it is
using the best scale in order to maximize profit. capacity planning, means that the firm must be
able to have accurate forecasts of demand, and communicate the relevant information to its
marketing and production departments. These two departments need to communicate with each
other, so that sales forecasts by marketing people can be met by the relevant production capacity.
Likewise, information relating to production constraints needs to be communicated to the
marketing department, so they do not ‘oversell’ the product.

2. Marginal analysis
Marginal benefits (profits, utility, product or revenue) tend to be large at low levels
of operation (operation can be measured in terms of input, output or expenditure). The operation
should be increased until these benefits become equal to the marginal costs. Further expansion is
wasteful or non-optimal. The following solved problem will illustrate the application of marginal
analysis to production theory.

3. Evaluating trade-offs
In production theory the concept applies to trade-offs between inputs. The most
obvious example is the trade-off between capital and labour, as has been seen in the example of
Viking Shoes. In this situation the trade-off only applies in long-run time frames. However,
many other trade-offs can exist, some of them in the short run.

C. How Economics Is Useful To Business

Economics is useful to business by guiding decisions on objectives, demand, costs,
market dynamics, labor, strategic planning, macroeconomic analysis, government policies, and
global markets. Business economics also analyzes economic conditions, processes, and relations
within companies, contributing to their growth and organization. Economics helps businesses
evaluate the trade-offs involved in allocating limited resources across various projects or
departments. This principle is essential for strategic planning and operational efficiency.
Businesses operate in a dynamic environment influenced by macroeconomic factors such as
inflation, interest rates, and government policies. Economics provides the tools to analyze these
external factors and adapt business strategies accordingly. This adaptability is crucial for long-
term sustainability and growth. Moreover, economics helps businesses by providing information
on market concentration, investment policy, and government factor markets, unemployment,
economic growth, globalization and ensuring long-term financial stability. Economics equips
managers with analytical tools and frameworks to make informed decisions. By understanding
concepts such as demand and supply, cost structures, and market competition, businesses can
develop strategies that align with market conditions. This knowledge helps in forecasting future
trends and making data-driven choices that enhance profitability and efficiency. Economics
informs businesses about the labor market and the effectiveness of various market forms,
enabling them to manage demand and costs effectively. The integration of economic analysis
with legal frameworks can also enhance transparency and efficiency in business operations,
addressing the complexities of contemporary economic realities. A solid grasp of
macroeconomic principles allows business leaders to interpret global economic trends and
policies, which is vital for strategic planning and operational efficiency. It equips graduates with
critical thinking skills and the ability to address complex issues using tools from economics,
business, mathematics, and other sciences. Economics can be broken down into microeconomics,
which examines individual decisions, and macroeconomics, which is concerned with the
economy as a whole. Both types of economics utilize historical trends and current conditions to
inform business decision-making and make predictions of how markets will behave in the future.
The nature and importance of business economics lie in the future prediction and drafting of
several regulations for profit maximization. The relevant areas pertained to this discipline are
demand analysis and forecasting, cost and production analysis, pricing decisions, profit
management, and wealth governance.

Importance of Economics in Business:

a. It implicates blending business processes with economic theories to simplify the
decision-making procedure.
b. It reviews the study of the firm’s financial, market-related, environmental, and
organizational issues. Moreover, it is considered both an art and science.
c. It covers demand analysis and forecasting, cost and production analysis, pricing
decisions and strategies, profit management, and wealth management.
d. Its objectives include future prediction, recognition, and clarification of business
issues, drafting business policies, and establishing relations between different
economic aspects.

Economics also has a big influence on societal issues such as tax and inflation, interest rates and
wealth, inequality and emerging markets, and energy and the environment. A broad subject,
economics provides answers to a range of health, social and political issues that impact
households and wider communities, business included.

Furthermore, applied economics exists, which uses economic theory and quantitative
methods to analyze business enterprises and the factors contributing to the diversity of
organizational structures and the relationships of firms with labour, capital and product markets.
The aim of applied economics is to inform economic decisions and predict possible outcomes.
Applied economics relates the conclusions drawn from economic theories and empirical studies
to real-world situations. The purpose of applied economics is to improve the quality of practice
in business, public policy, and daily life by thinking rigorously about costs versus benefits,
incentives, and human behavior. Applied economics can also help businesses make better
decisions. Understanding the implications of economic laws of supply and demand combined
with past sales data and marketing research regarding their target market can help a business
with pricing and production decisions. Awareness of economic leading indicators and their
relationship to a firm's industry and markets can help with operational planning and business
strategy. Understanding economic ideas such as principal-agent problems, transaction costs, and
the theory of the firm can help businesses design better compensation schemes, contracts, and
corporate strategies.

D. Benefits, Costs and Decisions

Economic decisions involve weighing benefits and costs to make effective
management choices. It provides insights into cost structures and pricing strategies. By analyzing
fixed and variable costs, businesses can identify areas for cost reduction and optimize their
pricing models. This understanding is vital for maintaining competitiveness and ensuring
sustainable profit margins.Understanding these factors is crucial for successful economic
decision-making processes. For decisions that affect output, knowing how costs vary with output
will help you compute some of the costs associated with these decisions. Economic thinking can
help managers make better business decisions by clarifying costs, benefits, and prices. The
interplay of benefits, costs, and decision-making in economics is crucial for effective resource
allocation and strategic planning. Understanding these elements allows individuals and
organizations to make informed choices that maximize utility while minimizing expenses. The
benefit-cost approach emphasizes future values over past ones, requiring a conversion of all
values to present terms, adjustment for uncertainty, after-tax considerations, and inclusion of
non-monetary factors. Effective decision-making involves evaluating the benefits of alternatives
against their costs, aiming for the highest benefit relative to cost or the lowest cost for a specific
benefit. Decision-making in economics has evolved, recognizing the complexity of behavioral
processes and the limitations of traditional models. This shift has led to a richer understanding of
how economic agents navigate choices. The application of mathematical techniques in economic
decision-making enhances the analysis of financial and social issues, providing a structured
approach to evaluating alternatives.

A first general principle is that only the future matters. Past costs or benefits are
irrelevant unless they help predict the future. "Sunk costs" are sunk. It may pay to throw good
money after bad, since the term "bad money" refers to past losses which cannot be eliminated
anyway. A car that has caused repeated repair bills may be expected to cause more and deserve
replacement, but it may also have had most of the periodic replace men ts done (muffler, brakes,
struts, tires) and be good for many a carefree mile. People often base their annual housing cost
on what they paid for it, but the real cost from now on is indicated by the home's present value.
The past capital gain is there whatever the future. A second general principle is that the net
benefit of each alternative must be compared with the total amount involved, i.e., some kind of
rate of return is needed. A simple approximation to the rate of return is the net benefit per dollar
committed. The most sophisticated calculation is to estimate the interest rate at which the present
value of the future streams of benefits and costs of each alternative is zero, the so called "internal
rate of return". Customers can then compare life insurance policies with different amounts of
saving, and compare them with other more flexible ways of investing their savings.

The concept of costs and benefits is related to the theory of rational choice (and
rational expectations) that economics is based on. When economists say that people behave
rationally, they mean that people try to maximize the ratio of benefits to costs in their decisions.
If demand for beer is high, breweries will hire more employees to make more beer, but only if
the price of beer and the amount of beer they are selling justify the additional costs of their salary
and the materials needed to brew more beer. Similarly, the consumer will buy the best beer they
can afford to purchase, but not, perhaps, the best-tasting beer in the store.

The concept of costs and benefits is applicable to other decisions that are not related
to financial transactions. University students perform cost-benefit analyses on a daily basis by
choosing to focus on certain courses that they've deemed more important for their success.
Sometimes this even means cutting the time they spend studying for courses that they see as less
necessary. Although economics assumes that people are generally rational, many of the decisions
that humans make are actually very emotional and do not maximize our own benefit. For
example, the field of advertising preys on the tendency of humans to act non-rationally.
Commercials try to activate the emotional centers of our brain and fool us into overestimating
the benefits of a given item.

Demand analysis is fundamentally concerned with the revenue side of an

organization’s operation; cost analysis is also vital in managerial economics, and managers must
have a good understanding of cost relationships if they are to maximize the value of the firm.
Many costs are more controllable than are factors affecting revenue. While a firm can estimate
what effect an increase in advertising expenditure will have on sales revenue, this effect is
generally more uncertain than a decision to switch suppliers, or invest in new machinery, or
close a plant. Cost analysis is made complex because there are many different definitions and
concepts of cost, and it is not always straightforward to determine which costs to use and how to
measure them in a particular situation. The focus here is on the relevant costs for decision-
making. In order to clarify this aspect the following four distinctions are important:

1. Explicit And Implicit Costs

Explicit costs can be considered as expenses or out-of-pocket costs (rent, raw
materials, fuel, wages); they are normally recorded in a firm’s accounts. However, the economic
cost of using a resource is its opportunity cost, which is the cost of forgoing the next most
profitable use of the resource, or the benefit that could be obtained from the next-best use.
Opportunity costs would include elements of both, but are not simply the sum of the two.
Opportunity costs should be used for decision-making purposes, meaning making the
fundamental decision. These costs then have to be compared with the expected benefits,
monetary and non-monetary. This does not mean that the other costs are unimportant; they are
still relevant in cash planning.

2. Historical And Current Costs

Historical costs represent actual cash outlay and this is what accountants record and
measure. This means measuring costs in historical terms, at the time they were incurred.
Although this is relevant for tax purposes it may not reflect the current costs. Current costs refer
to the amount that would be paid for an item under present market conditions. Often current
costs exceed historical costs, particularly with inflation. In some situations, for example IT
equipment, current costs tend to be below historical costs because of rapid improvements in
technology. In this case the item being costed may no longer be available, and the appropriate
cost is the replacement cost. This is the cost of duplicating the productive capability of the item
using current technology. Replacement cost is the relevant cost for decision-making.

3. Sunk and incremental costs

 Sunk costs are costs that do not vary according to different decisions. Often these
costs refer to outlays that have already occurred at the time of decision- making, like the cost of
market research conducted before deciding whether to launch a new product. Incremental costs
refer to changes in costs caused by a particular decision. Incremental costs are the relevant costs
for decision-making.

4. Private and social costs

Private costs refer to costs that accrue directly to the individuals performing a
particular activity, in other words they are internal costs. For private firms these are the only
costs that are relevant, unless there are ethical considerations. Social costs also include external
costs that are passed on to other parties, and are often difficult to value. For example, motorists
cause pollution and congestion which affect many other people (this is the economic justification
for fuel duties, which are an attempt to internalize these externalities. The social costs are the
sum of the two, meaning the total cost to society of using a resource (being careful not to double-
count any duties). Social costs are relevant for public policy decision-making. In this situation
the technique of cost-benefit analysis is often used. However, since we are largely concerned
with managerial decision-making, social costs and cost-benefit analysis will not be examined
here.

5. Relevant costs for decision-making

For private firms it has been shown above that it is the opportunity costs, the
replacement costs and the incremental costs that are relevant. These concepts are all illustrated in
the following case study.

Decisions regarding both human and natural systems often involve either explicit or
implicit consideration of relative costs and benefits. These costs and benefits, however, go well
beyond those captured in conventional economic cost-benefit analysis. It is not so much the mere
consideration of costs and benefits that hampers cost-benefit analysis but, rather, the narrowness
and incompleteness of the subset of costs and benefits that are usually considered. To use cost-
benefit analysis for social decision making, one needs to think very broadly about which
categories of costs and benefits need to be addressed (including effects on built, human, social,
and natural capital as well as sustainable well-being) and deal with the inherent uncertainty and
imprecision attached to many of the more important categories. One needs to consider the full
range of possible values and valuation methods, to shift the burden of proof to the parties that
stand to gain from the decision, to deal with the distributional consequences of decisions, and to
be clear about the social goals being served by the decision. Failure to think broadly enough
about costs and benefits leads to decisions that serve only narrow special interests, not the
sustainable well-being of society as a whole.

E. Investment Decisions: Look Ahead and Reason Back

Investment decisions in economics often involve a dual approach of looking ahead
and reasoning back, which is essential for effective strategic planning. This methodology allows
decision-makers to anticipate future outcomes while considering historical data to inform their
choices. The concept of "Looking Ahead" in investment decisions suggests a forward-thinking
approach to reason back in economics for making informed investment decisions. Filtering
methods in economic models involve looking backward and forward to derive agent
expectations, impacting investment decisions by utilizing conditional expectations as equilibrium
processes.

Forward Thinking
 This involves anticipating future outcomes or consequences of current actions. By
looking ahead, individuals or organizations can identify potential challenges and
opportunities that may arise.

Backward Reasoning
 This proactive mindset is crucial in planning and strategy development. After
envisioning the future, reasoning back means analyzing the steps needed to reach that
envisioned outcome. This process involves working backward from the desired goal
to determine the necessary actions and decisions that must be made in the present.

Investments imply willingness to trade dollars in the present for dollars in the future.
Wealth-creating transactions occur when individuals with low discount rates (rate at which they
value future vs current dollars) lend to those with high discount rates. All investment decisions
involve a trade-off between current sacrifice and future gain. If you’re willing to invest in
projects with relatively low rates of return, say 5%, then you’re willing to trade current dollars
for future ones at a relatively even rate. investment decisions require carefully weighing current
costs against future benefits, considering the time value of money, and using evaluation methods
like NPV and break-even analysis to determine profitability.

We can quantify the trade-off: ·

a) by compounding PV × (1 + r) = FV, or ·
b) by discounting PV = FV/(1 + r)
Where PV = present value, FV = future value, r = discount rate

Companies, like individuals, have different discount rates, determined by their cost
of capital. They invest only in projects that earn a return higher than the cost of capital.
Example: If you have a 5% discount rate, then $1.05 next year is worth $1.00 to you today.
Discounting payoffs that occur k periods in the future can be computed by recursively
discounting the payoffs, one period at a time. PV = FV/(1 + r).

Willingness to invest in projects with a low rate of return, indicates a willingness to

trade current dollars for future dollars at a relatively low rate. This is also known as having a low
discount rate (r).
 Individuals with low discount rates invest in more projects because more investments
meet their return criteria. They have current costs and future payoffs, just like
investments.
 Individuals who require bigger returns, say 20%, place a lower value on future
dollars. They invest only in projects with much higher rates of return,or, if none is
available, they borrow money. They have current payoffs and future costs.

One reason for identifying individuals with different discount rates is to recognize
the possibility of trade between them. The high-discount-rate individual would willingly
borrow from the low-discount-rate individual. A company’s cost of capital is a blend of debt and
equity, its “weighted average cost of capital” or WACC. Companies with a high cost of capital
invest only in high-return projects, whereas companies with a lower cost of capital invest in a
wider range of projects.

Time is a critical variable in investment decisions. Projects that return dollars sooner
have higher rates of return, all else equal. Example: Consider the returns on two different
projects.
A. First returns $1,200,000 at the end of year 1
B. Second returns $1,200,000 at the end of year 2

The company would obviously prefer to get its profit more quickly and so would prefer the first
project to the second.

NPV (Net Present Value) rule - a general decision rule that allows a company to decide
whether an investment is profitable. If the net present value of discounted cash flow is larger
than zero, then the project earns economic profit (i.e., the investment earns more than the cost of
capital).

The NPV rule illustrates the link between economic profit and investment decisions.
A. Projects with positive NPV create economic profit.
B. Projects with negative NPV may create accounting profit but not economic profit.

In making investment decisions, choose only projects with a positive NPV. Although NPV is the
correct way to analyze investments, not all companies use it. Instead, they use break-even
analysis because it is easier and more intuitive. Break-even quantity is equal to fixed cost divided
by the contribution margin. If you expect to sell more than the break-even quantity, then your
investment is profitable.

BREAK-EVEN ANALYSIS
In general, break-even analysis can be used in a variety of situations. Although
these techniques may not be as “correct” as NPV analysis, break-even analysis is easier to do and
it generates simple, intuitive answers. To illustrate, let’s examine an entry decision. Instead of
asking whether entry is profitable, we are going to ask an easier question, “Can I sell enough to
break even?” If you can sell more than the break-even quantity, then entry is profitable;
otherwise, entry is unprofitable.

To compute the break-even quantity, we have to distinguish between marginal costs (MC),
which vary with quantity, and fixed costs (F), which don’t. You’ll be able to analyze the vast
majority of your investment decisions with this very simple cost structure: You incur a fixed
cost to enter an industry and a constant per-unit marginal cost when you begin production.

The break-even quantity (Q) is:

Q = F/(P － MC)
where F is fixed cost, P is price, and MC is marginal costs.

The break-even quantity is the quantity that will lead to zero profit. The logic behind
the calculation is simple. Each unit sold earns the contribution margin (P － MC), so named
because this is the amount that one sale contributes toward covering fixed costs, and you have to
sell at least the break-even quantity to cover fixed costs. If you sell more than the break-even
quantity, you have earned more than enough to cover your fixed costs, or to earn a profit.
Shutdown Decisions and Break-Even Prices
To study shutdown decisions, we work with break-even prices rather than quantities.
If you shutdown, you lose your revenue, but you get back your avoidable cost. If revenue is less
than avoidable cost, or equivalently, if price is less than average avoidable cost, then shut down.
The break-even price is the average avoidable cost per unit. Avoidable costs can be recovered
by shutting down. If the benefits of shutting down (you recover your avoidable costs) are larger
than the costs (you forgo revenue), then shut down. The break-even price is average avoidable
cost.

Sunk Costs and Post-Investment Hold-Up

Economics is often called the “dismal science,” partly because of its dark view of
human nature. We have already seen the utility of using this perspective to look ahead and
reason back to worst case scenarios. Nowhere is this more important than in analyzing sunk cost
investments. Sunk costs are unavoidable, even in the long run, so if you make sunk cost
investments, you are vulnerable to post-investment hold-up. If you incur sunk costs, you are
vulnerable to post-investment hold-up. Anticipate hold-up and choose contracts or
organizational forms that minimize the costs of hold-up. Once relationship-specific investments
are made, parties are locked into a trading relationship with each other, and can be held up by
their trading partners. Anticipate hold-up and choose organizational or contractual forms to give
each party both the incentive to make relationship-specific investments and to trade after these
investments are made.

Solutions To The Hold-Up Problem

In general, there are many investments that are vulnerable to hold-up. Anytime that
one person makes a specific investment—one that is sunk or lacks value outside a trading
relationship—it can be held up by its trading partner. If one party anticipates that she is at risk
of being held up, she will be reluctant to make relationship-speci fic investments, or demand
costly safeguards, including compensation in the form of better terms from her trading partner.
This gives both parties an incentive to adopt contracts or organizational forms, such as
investments in reputation, merger, or the exchange of “hostages” to reduce the risk of hold-up.
The goal is to ensure that each party has both the incentive to make relationship-speci fic
investments and to trade after these investments are made.

In this industry, the enormous investment required to build a refinery is vulnerable to post-
investment hold-up—the bauxite mine could raise the price of ore once the refinery is built. So,
we rarely see refineries built without vertical integration or strong long-term requirements
contracts between the mine and refinery. These types of organizational forms “solve” the hold-
up problem by reassuring the refiner that it will not be held up once its relationship-specific
investment is made. Once relationship-specific investments are made, parties are locked into a
trading relationship with each other, and can be held up by their trading partners. Anticipate
hold-up and choose organizational or contractual forms to give each party both the incentive to
make relationship-specific investments and to trade after these investments are made.
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Froeb, L.M., & McCann, B.T. (2009). Managerial Economics: A Problem-Solving Approach
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