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Y2 economics of business strategy > Vertical boundaries of the firm > Flashcards

Vertical boundaries of the firm Flashcards

1
Q

The production of any good or service usually requires activites orgasnised in a:

A

Vertical value chain

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2
Q

Production activities flow from:

A

Upstream to downstream

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3
Q

What are upstream entities?

A

Suppliers of raw inputs

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4
Q

What are downstream entities?

A
  • Manufacturers
  • Distributors
  • Retailers
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5
Q

Activites in the chain include activites which are:

A
  • Associated directly with processing and distribution

- Professional support activities

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6
Q

What are examples of professional support activities?

A

-Accounting and planning

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7
Q

What’s the “make or buy” situation

A

Make - In house

Buy - outsource

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8
Q

What’s the name for outside specialist firms who can perform vertical chain tasks?

A

Market firms

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9
Q

What are the types of possibilities between make and buy?

A
  • Arm’s length transactions
  • Long term contracts
  • Strategic alliances and joint ventures
  • Parent/subsidiary relationship
  • Perform activity internally
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10
Q

What are advantages of vertical separation?

A
  • Lower costs
  • Economies of scale
  • Expertise and market incentives
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11
Q

What does vertical separation mean?

A

Buy

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12
Q

What are two advantages of using the market?

A
  • Intangible benefits

- Reduction of influence costs

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13
Q

What are advantages of vertical integration?

A
  • Effective control over supply chain
  • More streamlined info chains
  • Allow specific assets to be used
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14
Q

What are some disadvantages of using the market?

A
  • Cost of coordination
  • Contracts might be inadequate to deal with problems
  • Unwillingness of suppliers/buyers to develop and share valuable info
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15
Q

Without good coordination, what arises in the vertical chain?

A

Bottlenecks

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16
Q

Firm’s decisions depend in part on:

A

Other firms along the vertical chain

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17
Q

To ensure coordination, firms rely on:

A

Contracts

18
Q

The main costs associated with using the market are related to:

A
  • Negotiating contracts
  • Writing contracts
  • Enforcing contracts
19
Q

What are factors that prevent complete contracting?

A
  • Bounded rationality
  • Difficulties in specifying/measuring performance
  • Asymmetric information
20
Q

Why may firms not want to use outside firms in the vertical chain?

A

They don’t want to compromise the source of their competitive advantage and private company information

21
Q

What are sources of transaction costs?

A
  • Contracting cost
  • Investments in relationship specific assets
  • Possible opportunistic behaviour after the investment is made
22
Q

What are relationship specific assets?

A

Assets essential for a given transaction

23
Q

What are different forms of relation specific asset specificity?

A
  • Site specificity
  • Physical asset specificity
  • Dedicated assets
  • Human asset specificity
24
Q

What is site specificity?

A

Assets being located in close proximity to improve efficiency

25
Q

What is physical asset specificity?

A

Physical assets have to be designed for the specific transaction

26
Q

What are dedicated assets?

A

Some investments made to satisfy a single buyer

27
Q

What is human asset specificity?

A

Some employees may have to acquire relationship specific skills

28
Q

What is an example of site specificity?

A

Can producing plants near can filling plants

29
Q

What’s an example of physical asset specificity?

A

A refinery for a particular grade of oil

30
Q

What are examples of dedicated assets

A
  • Ports investing in certain assets

- Defense contractor’s investment in certain specialised facilities

31
Q

What is the hold up problem?

A

On party buys a relation-specific asset and then is “trapped” after purchase so can be held up by their partner

32
Q

Potential for holdup may lead parties to invest in:

A

Wasteful protective measures

33
Q

As potential fro holdup and difficulty and cost of protection increases, vertical integration is:

A

More likely

34
Q

Potential for holdups lead to:

A
  • Underinvestment in assets
  • Investment in safeguards
  • Reduced trust
35
Q

Firms should make an asset, rather than buy, if the asset is a source of:

A

Competitive advantage

36
Q

A firm should buy, rather than make, to avoid incurring:

A

Associated costs

37
Q

A firm should make, rather than buy, to keep:

A

Associated profits

38
Q

What’s an advantage for vertically integrated firms over nonintegrated?

A

They can buy at cost instead of at market price

39
Q

Firms should make rather than buy to:

A

Tie up a distribution channel

40
Q

What is rent in terms of an asset?

A

The amount of profit gained from a contract relating to an asset

Y2 economics of business strategy (9 decks)

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