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116 is the impasse between apple and the mac clone

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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 channels • may develop internal input supply capabilities to protect itself against holdup by independent input suppliers 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 delayed. 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–) _ _____________________________________________________ $ million/yr _ _____________________________________________________ (1) Total Variable Costs (VC) 3.0 (2) Ex ante opportunity costs of the investment in the plant 2.0 (3) Minimum revenue seller requires to enter the relationship = (1) + (2) 5.0 (4) Actual revenue 5.0 (5) Seller’s rent = (4) – (3) 0.0 (6) Ex post opportunity cost of the plant 0.5 (7) Minimum revenue seller requires to prevent exit = (1) + (6) 3.5 (8) Seller’s quasi-rent = (4) – (7) 1.5 _ _____________________________________________________ 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 $5.0 m/year 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 deal. 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 assets. 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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