Answer to Question #218749 in Marketing for Victor

Question #218749

in agricultural marketing in free economy there is an "invisible and visible hand" that affects price.with the use of example explain the factors shaping these hands

Expert's answer

A market closes when an agricultural enterprise is formed. Resources that were formerly allocated through the price system are now assigned by the firm's administrative authority. A model of price formation is used to investigate this choice of organizational form, in which agents negotiate prices on behalf of their principals when there is trading in a market. Principals incentivize agents to put out effort and establish prices by writing contracts based on the prices that the agents negotiate. The inclusion of agency issues in price formation necessitates the appointment of a principle with the capacity to coordinate economic activity. This is accomplished by closing a market and forming a firm, contracting directly with both agents and directing trading from a central location. Closing a market, on the other hand, results in the loss of information from market prices, which can be utilized to lower contracting costs. Internally produced transfer pricing cannot replicate this information.' As a result, knowledge from market prices is lost when the market is internalized within the enterprise. The relative worth of central authority over agents (the visible' hand) vs information from market pricing (the invisible' hand) is then used to assess whether a market or a company is the best organizational model.

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