Transaction costs, theory and apparent practice

It has long been the case that companies selling products, such as GE, make no money on the products themselves, but on financing or service (once the products are installed.) This can, of course, work in reverse: I learned last week that IBM, allegedly, sells outsourcing services without profit but make their money on product sales to their (in practice, captive) service customers.
This is a conundrum to me, for I learned in the late 90s that the falling transaction costs caused by vastly increases communications and coordination capability would lower factor prices and make cross-subsidization more difficult. Of course, our ability to construct and maintain complex pricing schemes would increase as well, but still – are these cross-subsidizing schemes clever bookkeeping, intentionally complicated pricing to confuse customers and competitors, or simply the result of historical developments, where companies structures haven’t yet caught up with economics realities?

1 thought on “Transaction costs, theory and apparent practice

  1. Steve

    This is very hard for me to believe or understand as well. The economics just don’t make sense. These deals are incredibly large and complex; they get re-priced frequently. Huge amounts of capital ($1MM) can go into pitching the deals alone. Given that IBM has multiple serious large competitors (Accenture, TATA, EDS…) who do not have products to sell and who are winning deals – why would they (IBM) leave money on the table? How does Accenture make money on outsourcing deals if they have no margin on products? For more info..

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