Vertical integration

Question 1

Vertical integration

Answer 1

The number of steps in the value chain that a firm accomplishes within its boundaries. Firms that are more vertically integrated accomplish more stages of the value chain within their boundaries than firms that are less vertically integrated.

Question 2

Backward vertical integration

Answer 2

A firm incorporates more stages of the value chain within its boundaries and those stages bring it closer to the beginning of the value chain, that is, closer to gaining access to raw materials.

An example of backward vertical integration is when a computer firm develops their own software, instead of letting another firm develop their software.

Question 3

Forward vertical integration

Answer 3

A firm incorporates more stages of the value chain within its boundaries and those stages bring it closer to the end of the value chain, that is, closer to interacting directly with final customers.

An example of forward vertical integration is when a firm has their own customer service department, instead of hiring a firm in let’s say India with employees that communicate with customers.

Question 4

Opportunism

Answer 4

Exists when a firm is unfairly exploited in an exchange. An example of opportunism is when a party to an exchange expects a high level of quality in a product is purchasing, only to discover it has received a lower level of quality than it expected.

Question 5

Transaction-specific investments

Answer 5

Are any investment in an exchange that has significantly more value in current exchange than it does in alternative exchanges.