BSZ_IM_Ch19_4e - Managerial Economics and Organizational...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 19: Page 1 CHAPTER 19 V ERTICAL I NTEGRATION AND O UTSOURCING This chapter analyzes the vertical boundaries of the firm. It begins by defining the vertical chain of production. The benefits of acquiring inputs through competitive markets (when they exist) is stressed. Reasons for nonmarket transactions (vertical integration and long-term contracting) are introduced. The choice between long-term contracts and vertical integration is analyzed. We focus particular attention on the importance of firm-specific investment in affecting this decision. Other major topics include: choosing the length of a contract, contracting with distributors, and recent trends in outsourcing. A case is provided. The appendix provides a more detailed example of how ownership rights can affect investment incentives (in this case, investments in effort). C HAPTER O UTLINE V ERTICAL C HAIN OF P RODUCTION B ENEFITS OF B UYING IN C OMPETITIVE M ARKETS R EASONS FOR N ONMARKET TRANSACTIONS Contracting Costs Market Power Taxes and Regulation Other Reasons V ERTICAL I NTEGRATION VERSUS L ONG -T ERM C ONTRACTS Incomplete Contracting Ownership and Investment Incentives Specific Assets and Vertical Integration Asset Ownership Other Considerations Continuum of Choice C ONTRACT L ENGTH C ONTRACTING WITH D ISTRIBUTORS Free-Rider Problems Double Markups Regulatory Issues R ECENT T RENDS IN O UTSOURCING C ASE S TUDY : A UTO C ORP M OTORS S UMMARY A PPENDIX : O WNERSHIP R IGHTS AND I NVESTMENT I NCENTIVES
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 19: Page 2 T EACHING THE C HAPTER We begin our lecture by discussing how the firm can expand its boundaries, vertically, horizontally, or through diversification. This chapter focuses on vertical boundaries. We briefly discuss Kodak’s outsourcing of components of its information system. In 1987, Kodak was ranked among the top 15 in size among IT installations in the US. In 1989, it outsourced major components of its IT operation to IBM, Digital Equipment, and BusinessLand. This action had a dramatic effect on how other companies viewed their IT operations. The class is shown a brief video (VHS) entitled Eastman Kodak Co.: Perspectives on Outsourcing (HBS: 9-193-506). This video shows Kathy Hudson, the Kodak manager who initiated the outsourcing decision, talking before a Harvard executive class. The film also shows a bank manager who has been involved in outsourcing. The students are asked to consider the following questions as they watch the film: (1) What was Hudson’s reason for outsourcing? (2) Does this reason make economic sense? (3) Does the bank manager’s framework for analyzing outsourcing decisions make economic sense? After the film, there is class discussion. Hudson argues that she had IBM build a plant so that Kodak could use the scarce capital somewhere
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/27/2010 for the course FIN 320f taught by Professor Toprac during the Spring '08 term at University of Texas.

Page1 / 18

BSZ_IM_Ch19_4e - Managerial Economics and Organizational...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online