12-Vertical_integration_and_vertical_restrictions

12-Vertical_integration_and_vertical_restrictions -...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Vertical Integration and Vertical Restrictions Econ 425, Summer I 2008
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 Intro b Some firms choose to vertically integrate and perform all production and distribution activities themselves. b Other firms prefer to write complex contracts that restrict the actions of those with whom they deal (establish vertical restrictions or restraints). b A final group of firms simply rely on the market. b Why do firms vertically integrate? Why do firms sometimes use vertical restrictions? What about franchise systems? b What should public policy be toward these practices?
Background image of page 2
3 When will a firm vertically integrate? b Whether a firm performs a task itself or relies on the market basically depends on relative costs. - firms can avoid integration by outsourcing. e.g. retail and commercial banks in U.S. (67%); high-tech firms; governments. b Costs of vertical integration: - High costs of supplying own factors or of distributing product; - Larger firms have to deal with higher management and monitor costs; - Legal costs of merger. b What about the advantages to integrating?
Background image of page 3

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

View Full DocumentRight Arrow Icon
4 Advantages to integrating 1. Lower transaction costs. b Specialized assets: give rise to opportunistic behavior. - specific physical capital; specific human capital; site-specific capital. b Uncertainty. 2. Assure supply. b Avoid rationing of important inputs; minimize inventory costs while ensure timely delivery (Toyota and Dell). 3. Eliminate externalities. b Maintain high uniform standards (positive reputation externality).
Background image of page 4
5 Advantages to integrating (2) 4. Avoid Government regulation. b Avoid price controls; shift profits because of different tax rates. 5. Increase monopoly profits. b A monopoly supplier of an input can increase its profits by vertically integrating to monopolize producing industry. How? - production function, Q=f(E,L), with CRS; - inputs produced at constant marginal cost (w,m); - monopoly upstream (supply of energy), competition downstream; - costs of vertically integrating.
Background image of page 5

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

View Full DocumentRight Arrow Icon
6 Advantages to integrating (3) b If downstream production process uses fixed proportions, upstream monopoly does not have an incentive to vertically integrate. - it makes same profits whether it integrates or not!
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/01/2011 for the course ECON 425 taught by Professor Watugala during the Spring '06 term at Texas A&M.

Page1 / 18

12-Vertical_integration_and_vertical_restrictions -...

This preview shows document pages 1 - 7. Sign up to view the full document.

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