Every time we find out about a big company swallowing up a smaller company for a ridiculous amount of money, we get a feeling something fishy is going on. They’re probably just trying to squash the competition and become enormous monopolies to force us lowly consumers into paying higher prices for their products, right?
We can imagine, though, that these types of firm mergers and acquisitions are not all bad. We might just be witnessing a beautiful love story blossoming into a happy marriage. In fact, we (the lowly consumers) might reap some serious benefits from these mergers. To explain, we need to learn more about yet another Nobel Prize winner in economics: Oliver Williamson.
Oliver Williamson won the prize for providing a theory of why “some economic transactions take place within firms and other similar transactions take place between firms, that is, in the marketplace.” Further, “when should decision power be controlled inside the organization and when should decisions be left to the market.”
This, like most Nobel Prize-winning theories, is a fundamental economic question that can be applied to our own lives. In lieu of the most lovey-dovey (or depressing) holiday of the year, let’s get into the firm-style behaviors of our romantic relationships.
It’s About That Time…
Say you’ve been dating your significant other for some time now and you think it’s time to move forward. You decide it’s time to move in together. Without bringing love into it (too much), we can provide a Williamson-esque analysis to this decision. The decision to move in together makes sense economically. Particularly, it’s due to what Williamson calls “asset specificity.”
In his seminal paper, Williamson notes that “Asset specificity can arise in any of three ways: site specificity, as when successive stations are located in cheek-by-jowl relation to each other so as to economize on inventory and transportation expenses; physical asset specificity, as where specialized dies are required to produce a component; and human asset specificity that arises from learning by doing.”
Your significant other has a particular asset (relax the implicit pun in that term), that makes it economically efficient to bring it under one roof.
Furthermore, you and your significant other are effectively “locked into” the transaction to a significant degree, especially after deciding to exclusively date each other. The cost of turning to alternative sources for the particular asset is way too high. Just think of how it would play out if you simply switched to an alternative. Also, it’s good to remind ourselves how difficult it is to get back into the dating game even after one year of sharing information and getting over each other’s’ quirks.
In any case, for some reason or another, though there are arguably many substitutes out in the world—fish in the pond—there is something about this one that is specific to your production process. “Doing business” with each other for the extended amount of time, the product that your significant other brings to the table has become a necessary component of the overall product–a happy life.
While you’re not living together, there are several factors that can create inefficiencies in this overall product. An obvious inefficiency is the presence of two rent payments. In cities like Washington D.C., this can be a serious pain in the ass-pocket. Living under one roof is similar to Williamson’s “site specificity”.
The “specialized dies” he talks about, could be a number of things. Perhaps your significant other makes a delicious lasagna or talks about economics in a way that really gets your engine going. Whatever it is, you realized you can’t live without it. (All together now, “Awwwwwww.”) Just another reason to move in together.
We’re all just trying to minimize transactions costs
Williamson’s theory of the firm is rooted in Nobel laureate Ronald Coase’s theory of transactions costs. Couples, like firms, bring processes under one roof to minimize the cost of transacting. Facebook acquired Instagram, not necessarily to rule the world, but to minimize the cost of having to contract out with Instagram for Facebook users to share pictures on such a fun and unique platform. Instead of dealing with the contracting headache Amazon would have to endure to start innovating in the grocery sector, it simply just has Whole Foods move-in. Oil companies, pharmaceuticals, restaurants, cable and tech companies all do this for this reason.
Sure, one reason companies make acquisitions can be to squash some of the competition in these markets. But sometimes, acquisitions help eliminate some inefficiencies in the production process. These inefficiencies can translate into better products and lower prices for consumers. A win-win situation for everyone.
This Valentine’s Day, if you feel it’s time to take the next step, you now have a quasi-romantic, economic defense for moving in—asset specificity, sweetcheeks.
It could minimize the cost to produce a happy life, for the both of you.
Disclaimer: Williamson notes “bounded rationality”. This is the idea that the decisions people make are limited by imperfect information, the cognitive limitations of their minds, and the amount of time they have to make decisions. ReasonablEconomics is not responsible if this turns out to be a horrible move. Please move-in with caution.