Question at position 3 Tree Corporation recently acquired a smaller competitor, Branch and Associates, which specializes in issues not previously covered by Tree Corporation, such as intellectual property cases. Given the increase in the firm’s size and complexity, it is likely that its internal transaction costs willdecreasetransition to external transaction costsbe eliminatedincreaseClear my selection单项选择题
A
decrease
B
transition to external transaction costs
C
be eliminated
D
increase

Question

Question at position 3 Tree Corporation recently acquired a smaller competitor, Branch and Associates, which specializes in issues not previously covered by Tree Corporation, such as intellectual property cases. Given the increase in the firm’s size and complexity, it is likely that its internal transaction costs willdecreasetransition to external transaction costsbe eliminatedincreaseClear my selection单项选择题

A

decrease

B

transition to external transaction costs

C

be eliminated

D

increase

BlackTom AI · Accepted Answer

Internal transaction costs rise when a firm expands complexity because coordinating, monitoring, and integrating new activities requires more internal effort and resources.

Relevant knowledge points and concepts:
- Transaction cost economics distinguishes internal transaction costs (coordination, monitoring, bureaucratic overhead inside the firm) from external transaction costs (search, bargaining, and enforcement when using the market).
- Mergers/acquisitions that add new services or specializations increase organizational complexity, creating additional internal coordination demands.
- Economies of scale/scope can reduce per-unit costs, but increased complexity often produces diseconomies of scale (higher administrative and information-processing costs).

Step-by-step reasoning:
1. Tree Corporation acquires Branch and Associates, which specializes in intellectual property (IP) services—an area Tree did not previously handle.
2. Integration requires aligning IT systems, billing, client-management processes, legal procedures, and possibly retraining or hiring staff to handle IP cases.
3. Management must coordinate workflows across previously separate teams, establish reporting lines, manage cultural differences, and set new incentive structures. Each of these tasks is an internal transaction that consumes time and resources.
4. Principal–agent problems and information asymmetries typically increase after acquisition, requiring greater monitoring and governance (additional internal costs).
5. While some external transaction costs (e.g., contracting with outside IP specialists) could be avoided by bringing capabilities in-house, the net immediate effect of adding a new specialty and greater firm size is higher internal transaction costs due to increased coordination complexity.

Why other options are incorrect:
- “Decrease”: Unlikely because integration complexity often raises internal overhead even if some per-unit costs fall.
- “Transition to external transaction costs”: Acquisition internalizes activities rather than externalizes them; it does not convert internal costs into external market costs.
- “Be eliminated”: Integration cannot remove internal transaction costs; it typically creates new internal coordination needs.

Conclusion: Therefore, the firm’s internal transaction costs will increase, matching the provided answer.

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