I somewhat struggle to understand the concept of hierarchies or markets.
Is it essentially = make or buy?
Are you sure this is a question relevant to E2?
A market can be defined as the sum total of all the buyers and sellers in the area or region under consideration.
In economics, a hierarchy is the structure of who controls money and who has the ability to exert power over those on lower levels. It is the structure of power.
The “Markets and Hierarchies” theory is in the BPP E2 book under the transaction cost approach. I don’t tend to question the content of the book, just accept if it’s there it must be relevant.
It is explained there but I just don’t get it.
OK, I see where you are now. Essentially, as you suggest, it is a more complex version of make or buy:
Hierarchy solution: do it yourself, using internal resources and management.
Market solution: buy in from outside.
Each approach has its own set of costs:
Hierarchy: recruitment, training, non-current assets etc
Market: finding suppliers, selection, contract supervision etc.
I think that the main point is that to properly assess the market solution you have to take into account not just the buy-in cost itself, but all the other costs mentioned above.
P77 of our notes might help.
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