Unformatted text preview: s to help negotiate with
the independents R.E. Marks ECL 2-13 • use the threat to further use the market to motivate the performance of its internal
• may develop internal input supply capabilities to protect itself against holdup by independent
A clear example of holdup (see Besanko p.116)
is the impasse between Apple and the Mac
clone makers over the price for licensing the
MacOS 8 — the CEO of Power Computing has
recently quit, and its forthcoming IPO is likely
But tapered integration may:
• not allow sufﬁcient scale in the internal and external channels to produce efﬁciently
• lead to coordination problems over speciﬁcations and timing
• lead to much higher monitoring costs Alternatives to Make or Buy? R.E. Marks ECL 2-14 2.4 Rents and Quasi-Rents
(See Besanko pp.114–) _
(1) Total Variable Costs (VC)
(2) Ex ante opportunity costs of the
investment in the plant
(3) Minimum revenue seller requires
to enter the relationship = (1) + (2)
(4) Actual revenue
(5) Seller’s rent = (4) – (3)
(6) Ex post opportunity cost of the plant
(7) Minimum revenue seller requires
to prevent exit = (1) + (6)
(8) Seller’s quasi-rent = (4) – (7)
_____________________________________________________ Seller will produce a good for a buyer:
• Total Variable Cost is $3.0 m/year
• Plant investment of $40.0 m up front.
• Minimum acceptable rate of return is 5% p.a. ∴ annual ex ante opportunity cost is $2.0 m
∴ the minimum return to the seller must be
The seller’s rent is the difference between what it
actually receives and what it must receive
(minimum) to make it worthwhile to enter the
Before the deed (ex ante facto), it must receive at
least $5.0 m/year.
Its rent in this case is zero, which reﬂects that fact
that competition to supply has been ﬁerce. R.E. Marks ECL 2-15 Suppose the plant is buyer-speciﬁc:
• Once the plant is built, it has few alternative uses.
• Its next best use is only $0.5 m/year (its ex post facto opportunity cost).
∴ the minimum the seller must receive not
to exit = $3.5 m/year.
• This is the TVC plus the ex post opportunity cost.
• If the seller received only $3.25 m, then its earnings would only be $0.25 m, which is less
than its next best return of $0.5 m/year.
The seller’s quasi-rent is the difference between:
a. the revenue the seller would actually receive
under the initial terms, and b. the revenue it must receive to be induced not
to exit after it has made its relationshipspeciﬁc investments. Here, its quasi-rent is $1.5 m/year
Competitive bidding ex ante does not drive quasirents to zero when there are relationship-speciﬁc
The buyer has more bargaining power, ex post,
when there are relationship-speciﬁc assets.
The holdup problem occurs when a seller tries to
exploit the relationship...
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- Fall '13
- Microeconomics, Economics of production, R.E. Marks