25C00100 - Entrepreneurship and Innovation Management, 01.11.2018-22.11.2018

Factors that prevent complete contracting

• Bounded rationality: Individuals have limited capacity to process information so they cannot know everything and foresee all possible contingencies that can arise over the course of a business relationship. Therefore, they cannot draw contracts that cover everything.
  
• Difficulties in specifying/measuring performance: It can be debated what performance of a partner constitutes fulfilment of a contract because performance cannot always (or even often) be measured unambiguously.
• Asymmetric information: Seller can have more relevant information that the buyer and the seller can use this information opportunistically. Contracting on items that are prone to information asymmetry is difficult.

Incumbent is a firm that is already operational in a market. Entrant is a firm that is aspiring to enter the market.

Indifference curve denotes different combinations of price and quality that are of equal value to the consumer. So the consumer would be indifferent between choosing a higher quality product for a higher price, or a lower quality product with a correspondingly lower price.

Information asymmetry means that Jane knows more about her business and future intentions than Emma, and vice versa. For example, Jane knows that she doesn’t have a cost advantage but she counts on Emma not knowing that, and uses this to her advantage.