Chapter 4 - integration and its alternatives

Question 1

property rights theory (PRT)

Answer 1

explains how integration affects performance in the vertical chain

Question 2

integration matters because it …

Answer 2

determines who gets to control resources, make decisions, and allocate profits when contracts are incomplete and trading partners disagree

Question 3

residual rights of control

Answer 3

owner obtains all rights of control that are not explicitly stipulated in the contract

Question 4

three alternative ways to organize a transaction

Answer 4

• nonintegration
• forward integration
• backward integration

Question 5

nonintegration

Answer 5

two firms are independent; each manager has control over its own assets

Question 6

forward integration

Answer 6

firm 1 owns the assets from firm 2

Question 7

backward integration

Answer 7

firm 2 owns the assets form firm 1

Question 8

path dependence

Answer 8

past circumstances could exclude certain possible governance arrangements in the future

Question 9

technical efficiency

Answer 9

whether the firm is using the least-cost production process

Question 10

agency efficiency

Answer 10

the extent to which the exchange of goods/services in the vertical chain has been organized to minimize the coordination, agency and transaction costs

Question 11

economizing

Answer 11

describes balancing act between technical and agency efficiency

Question 12

scale and scope economies

Answer 12

a firm gains less from vertical integration when outside market specialists are better able to take advantage of economies of scale and scope

Question 13

product market share and scope

Answer 13

a firm with a large product market share benefits more from vertical integration. same holds for a firm with multiple product lines (e.g., save costs by producing shared components)

Question 14

asset specificity (reg. vertical integration)

Answer 14

a firm gains more from vertical integration when production of inputs involves investments in relationship-specific assets

Question 15

double marginalization

Answer 15

applying another markup to already marked-up supply prices

Question 16

double markup causes the prices of finished goods to …

Answer 16

exceed the price that maximizes the joint profits of the supplier and buyer

Question 17

tapered integration

Answer 17

mixture of vertical integration and market exchange

Question 18

benefits of tapered integration

Answer 18

• expands firm’s input and/or output channels without requiring substantial capital outlays
• firm can use information about cost/profitability of its internal channels for negotiation
• firm can motivate its internal channels by threatening to expand outside (vice versa)
• firm can protect itself against holdup

Question 19

disadvantages of tapered integration

Answer 19

• forced to share production, both internal and external channels might not achieve sufficient scale to produce efficiently
• may lead to coordination, monitoring problems
• managers may maintain internal capacity rather than close facilities that had formerly been critical to a firm

Question 20

drawbacks of strategic alliances/joint ventures

Answer 20

• firms also risk losing control over proprietary information
• there are often no formal mechanisms for making decisions or resolving disputes expeditiously
• agency costs can arise within departments of firms that are not subject to market discipline
• free rider problem: each firm is insufficiently vigilant in monitoring alliance’s activities because neither captures the full benefit of such vigilance
• influence costs arise due to employees that engage in influence activity

Question 21

implicit contracts

Answer 21

unstated understanding between independent parties in a business relationship