11-5 Lecture - 11/5/09 PAM 2000 Vertical Integration...

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11/5/09 PAM 2000 Vertical Integration Marginal expenditure – higher than the wage in a monopsonistic market Amount it takes to hire one more worker Just wage in a perfectly competitive market Inputs materials and labor (upstream) final good (downstream) consumers Vertically integrating upstream (focusing more on materials/labor) or downstream (Apple selling directly to consumers, have retail stores; Toshiba just outsources selling to Best Buy) Pizza places deliver (downstream) How vertically integrated should a firm be? Transactions costs – if it’s cheaper to outsource, then outsource; if it is cheaper to keep it in the company, then keep it within the company Fads in vertical integration Firms should vertically integrate more guarantee higher quality (manufacturers could screw up/make low quality products) Then this fad switches and companies should focus on core competencies and outsource everything else No right or wrong answers Not measured with great accuracy and more estimated Benefits of Vertical Integration
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11-5 Lecture - 11/5/09 PAM 2000 Vertical Integration...

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