Exam 19: Vertical Integration and Outsourcing

Nonmarket transactions refer to:

Two contract terms that reduce transfer pricing problems are:

Granting exclusive territories:

When a corporation participates in more than one successive stage in a multi-stage production process it is said to be:

Tasty Chicken, Inc. is a large producer of chicken for grocery stores. It usually engages in a long-term contract with these stores to maintain demand for its product. However, Tasty Chicken is regularly plagued with rising and falling prices for its supplies: particularly chicken feed and new chicks. Should Tasty Chicken vertically integrate upstream, building or buying a hatching company and an animal feed company? What are the pluses and minuses of such a decision?

Andy Freeman is a sales representative in a rural area, selling herbicides to farmers. He drives close to 1,000 miles every week that he is on the road. Many of the miles are on dirt roads. From an asset ownership point of view, what type of car should he buy?

Independent distributors of soda can free ride on the name brand of the producing company. Two solutions to this problem are:

When asset specificity is very low and there is no market uncertainty, then it is best for a firm to:

When asset specificity is very high and there is a lot of market uncertainty, then it is best for a firm to:

Nonmarket transactions refer to:

Agri-Tech makes machinery for chicken slaughterhouses. Agri-Tech has developed a de-boning technique specifically for Tasty Chicken. It is likely that Agri-Tech will desire:

Specific assets can create problems for a company. If a supplier invests in new machinery to deliver a part useful only to its biggest and best customer, it can find itself with:

When a firm establishes a long-term contract with another firm where the first firm grants a second independent business the rights to use the first firm's name, reputation and business format, this is a:

SUVmart wants to buy 250 Rhinos from AutoCorp which wants to charge an upfront franchise fee. What will the franchise fee be?

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 because:

What limits the entire economy from being served by one gigantic firm that produces everything?

Why aren't all economic transactions conducted through markets?

LightCo sells fairly standard light bulbs to Bodyworks, while BodyWorks sells components that can only be used by AutoCorp. Why is LightCo only interested in price while BodyWorks hires a law firm to negotiate its contracts with AutoCorp?

Firm specific assets, costs or measuring quality, externalities, and coordination problems all may mitigate against:

What is outsourcing and what forms does it take?