Part 1 Flashcards
What are the sources of economies of scale?
Indivisibility & spreading of fixed costs
Specialisation
Economies of density
Reasons to buy:
1) Scale, learning economies
2) Agency costs (preventing shirking)
3) Influence costs (divisions compete for resources)
Reasons to make:
1) Coordination advantages
2) Private information
3) Lack of transaction costs
Relation-specific assets?
1) Site specificity
2) Physical asset specificity
3) Human asset specificity
4) Dedicated assets
What is Quasi-rent?
Expected profit from relationship in which you invest - (minus) second best alternative
What is hold-up?
Renegotiating terms of a deal after parties have already made the investments
Optimal vertical organisation..
The minimum sum of technical & agency costs; ‘economizing’
Double marginalisation happens when..
there is upstream & downstream monopolistic market power;
Input price > MC input (monopolistic seller)
Final price > MC downstream (the buyer is a monopolistic seller in their market)
So, price is marginalized twice
*Vertical integration avoids double marginalization
Forward Integration vs Backward Integration
Forward – upstream firm owns downstream
Backward – downstream owns upstream
Alternatives to make-or-buy decisions:
- Tapered Integration
- Franchising
- Strategic alliances + JV
- Close-knit relationships
Tapered Integration..
Mix of vertical integration + market (both firms make and buy)
Franchising..
Franchisee provides capital to build + operate stores, and pays fee for using the brand
Close-knit relationships..
long-term relationships based on trust (no contract), with a threat of losing future business (Asia, Keiretsui)
The Property Rights Theory of the Firm
integration matters because it determines who gets control of resources and makes decisions
