ECN363001 S18 Feb 15(1).pptx - Vertical Boundaries of a...

Vertical Boundaries of a
Firm
ECN 3630-01
February 15, 2018
1

Agenda
•
The Efficiency Tradeoff Model - Tradeoffs between Technical
efficiency and Agency efficiency
•
Asset ownership and integration
•
Alternatives to Vertical Integration
o
Tapered integration
o
Franchising
o
Strategic Alliances and Joint Ventures
o
Implicit contracts and long term relationships
•
Applications
o
Pharmaceutical Industry
o
Vertical Integration in the Insurance Industry
o
Franchising in China
o
Toys “R” Us Enters Japan
o
The Women’s Dress Industry
2

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 differs
o
Across industries
o
Across firms within an industry
o
Across stages of the vertical chain
o
Across time
3

The Tradeoff in Vertical
Integration
•
Technical efficiency - least cost production
•
Agency efficiency – agency and influence costs,