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Vertical Boundaries of a FirmECN 3630-01 February 15, 20181
Agenda•The Efficiency Tradeoff Model - Tradeoffs between Technical efficiency and Agency efficiency•Asset ownership and integration •Alternatives to Vertical IntegrationoTapered integrationoFranchisingoStrategic Alliances and Joint VenturesoImplicit contracts and long term relationships•ApplicationsoPharmaceutical IndustryoVertical Integration in the Insurance IndustryoFranchising in China oToys “R” Us Enters JapanoThe Women’s Dress Industry2
Vertical Boundaries•For each step in the vertical chain the firm has to decide between market exchange and vertical integration •The degree of vertical integration differsoAcross industriesoAcross firms within an industryoAcross stages of the vertical chainoAcross time3
The Tradeoff in Vertical Integration•Technical efficiency - least cost production•Agency efficiency – agency and influence costs,