Exam 19: Vertical Integration and Outsourcing

If an important component of a firm's production is difficult to specify in a contract and even more difficult to enforce in its production standards, then it probably makes sense to:

If a firm decides to move away from ownership of a vertically integrated production process and begins to purchase supplies or other services from other businesses, this is known as:

A minor, but important reason, for using non-market transactions is that:

A firm that produces its own output is engaging in ________ integration, while a firm that markets its own good is engaging in ________ integration.

Tasty Chicken has been buying its animal feed in the open market. It notices that about 10 percent of its purchases are watered down, so that the feed seems to weigh more than it actually does. To improve quality of its purchases, Tasty Chicken might consider:

Independent distributors of a brand name product:

Why are firm-specific assets so important in the decision to build internally, negotiate a long-term contract, or buy on the open market?

The case of the Kodak - IBM outsourcing agreement for payroll software indicates that ________ can cause significant long-term holdup problems.

Agri-Tech supplies a patented sweetener to various food processors. It has noticed that the value of the sweetener varies dramatically from one buyer to another, depending on the end-use demand. But its experiments with charging higher prices to some buyers have failed. The demand for the juices is supplies are highly price elastic while the demand for sweetened medicine is relatively less elastic. Can Agri-Tech find a way to successfully price discriminate?

Autocorp faces the following demand function for its automobiles: P = 55,000 - 200 Q Its MC is $9,000. What will its price be if it decides to sell the automobiles by itself and what will the price be if it sells though SUVmart, an independent distributor. What is the consequence of this exclusive dealing on prices?

The right of residual use of a specific asset by the owner often argues for:

DrugCo has two demand equations for its retail products (pain reliever and cancer): Pain relief: P = 100 - 10 Q Cancer drug: P = 200 - 15 Q The marginal cost of production is $30. Which product should go to the retail market and which should go to the wholesale market? What are the corresponding retail and wholesale prices? What would happen if the sales are switched from the retail to the wholesale and vice versa?

SUVmart wants to buy its quota of 250 Rhinos from AutoCorp. For the quota system to work efficiently AutoCorp must commit credibly to the:

While firms buy many of their inputs through the open market, there is often a desire to produce critical inputs. A common concern in producing an input yourself (internally) is that:

AutoCorp faces a demand for its primary line of sporty mini-cars in Little Rock of P = $30,000 - 5 Q with a production cost of MC = $8,000. Discuss the implications of selling the new mini-car through its own dealership or through the local dealer: MiniMart.

When a firm establishes a long-term contract with another firm that is characterized by common ownership of a supplier with another firm, this is a:

Tasty Chicken, Inc. has worked hard to develop its brand name. Its motto "Absolutely Tasty" has become a common term used for good food. But the company finds that grocery stores do not feature their products in high visibility areas. Further, restaurants never tell their patrons they are eating "Tasty." What needs to be done?

When a firm establishes a long-term contract with another firm where a firm acquires an asset such as a machine or a building through a rental agreement, this is a:

AutoCorp is a dealership that has a contract that prevents the main company from opening another dealership within a 30 mile radius. This is an example of:

Two contract terms that reduce free-rider problems are: