Vertical boundaries of the firm Flashcards
The production of any good or service usually requires activites orgasnised in a:
Vertical value chain
Production activities flow from:
Upstream to downstream
What are upstream entities?
Suppliers of raw inputs
What are downstream entities?
- Manufacturers
- Distributors
- Retailers
Activites in the chain include activites which are:
- Associated directly with processing and distribution
- Professional support activities
What are examples of professional support activities?
-Accounting and planning
What’s the “make or buy” situation
Make - In house
Buy - outsource
What’s the name for outside specialist firms who can perform vertical chain tasks?
Market firms
What are the types of possibilities between make and buy?
- Arm’s length transactions
- Long term contracts
- Strategic alliances and joint ventures
- Parent/subsidiary relationship
- Perform activity internally
What are advantages of vertical separation?
- Lower costs
- Economies of scale
- Expertise and market incentives
What does vertical separation mean?
Buy
What are two advantages of using the market?
- Intangible benefits
- Reduction of influence costs
What are advantages of vertical integration?
- Effective control over supply chain
- More streamlined info chains
- Allow specific assets to be used
What are some disadvantages of using the market?
- Cost of coordination
- Contracts might be inadequate to deal with problems
- Unwillingness of suppliers/buyers to develop and share valuable info
Without good coordination, what arises in the vertical chain?
Bottlenecks
Firm’s decisions depend in part on:
Other firms along the vertical chain
To ensure coordination, firms rely on:
Contracts
The main costs associated with using the market are related to:
- Negotiating contracts
- Writing contracts
- Enforcing contracts
What are factors that prevent complete contracting?
- Bounded rationality
- Difficulties in specifying/measuring performance
- Asymmetric information
Why may firms not want to use outside firms in the vertical chain?
They don’t want to compromise the source of their competitive advantage and private company information
What are sources of transaction costs?
- Contracting cost
- Investments in relationship specific assets
- Possible opportunistic behaviour after the investment is made
What are relationship specific assets?
Assets essential for a given transaction
What are different forms of relation specific asset specificity?
- Site specificity
- Physical asset specificity
- Dedicated assets
- Human asset specificity
What is site specificity?
Assets being located in close proximity to improve efficiency
