Horizontal and Vertical Boundaries Flashcards
Outline: horizontal boundaries
Identify the quantities and varieties of products and services that a firm produces.
Horizontal boundaries depend on economies of scale and scope
Outline: verticle boundaries
Production of any good and service requires a range of activities organized in a vertical chain.
Vertical boundaries identify the activities that the firm performs itself, as opposed to purchases from independent firms in the market.
Outline: product scope
How specialized should the firm be in terms of the range of products it supplies?
Outline: verticle scope
What range of vertically linked activities should the firm encompass?
Outline: geographical scope
What is the optimal geographical spread of activities for the firm?
What determines which activities are performed within a firm and which are performed through the market?
If the transaction costs associated with organizing across markets exceeds the administrative costs of organizing within firms, then the productive activity will be internalized within firms
When do economies of scale exist?
When firm achieves unit-cost savings as it increases the production of a given good or service
When do economies of scope exist?
Exist if the firm achieves savings as it increases the variety of goods and services it produces
TC(Qx,Qy)
Outline: verticle boundaries
Identify the activities that the firm performs itself, as opposed to purchases from independent firms in the market
Outline: vertical chain
Process that begins with the acquisition of raw materials and ends with the distribution and sale of finished goods
How is the extent of verticle integration indicated?
by the ratio of a firms value added to its sales revenue
Verticle intergration can be….
Backward or forward
Full or partial
List the 5 benefits of verticle integration
1 - Technical economies from integrating processes
2 - Superior coordination
3 - Avoids transaction costs of market contracts in situations where there are:
- small numbers of firms
- opportunism and strategic misrepresentation
- transaction-specific investments
- taxes and regulations on market transactions
4 - Avoids “double marginalisation” problem
5 - Prevents leakage of private information
List the 6 costs of verticle integration
1 - Differences in optimal scale between difference stages of production prevents balanced vertical integration.
2 - Development of distinctive capabilities is easier for specialised firms than large vertically integrated firms.
3 - Strategic differences between different vertical stages creates management difficulties.
4 - Changes incentives between vertically related businesses
5 - Limits flexibility in responding to demand cycles and in responding to changes in technology, customer preferences
6 - Compounds risk
What does an effective contract depend on?
1 - The completeness of the contract
2 - The available body of contract law
