Examples Local baker buys flour Independent restaurant outsources payroll Can

Examples local baker buys flour independent

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Examples Local baker buys flour Independent restaurant outsources payroll Can company buys aluminum Disney might outsource running hotels
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46 Economies of scale and scope Economies of scope are less common in vertical relationships than horizontal Sharing of brand / reputation less important Technology and skills likely to be different Examples Steel and automobiles Making movies and running movie theaters
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47 Empirical evidence on vertical integration Most studies find that observed vertical integration is efficiency-enhancing Little evidence that it increases market power Strong evidence that vertical integration is more likely when potential hold-up problems are big “Design-specificity” in airline components predicts vertical integration Inputs which are “complex” or require intensive coordination more likely to be produced in-house Technology can change what contracts are optimal Long-haul trucking was mainly owner-operated Onboard computers made monitoring much easier, lead to less independent contracting and larger trucking firms
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Testing the logic What do you think of the following scenarios? A car company integrates into steel production to eliminate fluctuation in its input prices The Gap opens its own factory to dye fabric to ensure consistency in its colors Dell should merge with Intel to reduce supplier power Coke should own a can company so it will locate close to its major bottling plant Husky should produce its most critical components in-house so it can maintain strict quality control 48
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Vertical Restraints 49
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50 Alternatives to vertical integration Even if you add all the pieces up and find that integration creates value on net, you need to ask: Can we capture the same benefits by means other than integration ? – Contracts – Alliances – Licensing Joint ventures
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51 Vertical restrictions to reduce free-riding downstream Suppose beer brewer has concerns that distributors will Under-invest in promoting the brand Aggressively steal market share from each other Solutions Exclusive territories
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52 Vertical restrictions to reduce free-riding downstream Suppose Toyota dealer invests in showroom, coffee, test drives, sales effort Consumers test drive at dealer and then buy at a discount online Toyota is worried that if this continues dealers will stop exerting effort promoting cars Solution Resale price maintenance Dealer licensing
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53 Vertical restrictions to reduce free-riding upstream Suppose an insurance agent sells policies for two insurance companies Suppose the insurance companies have customer lists that the agent could use to increase sales Company 1 is worried that its list would also be used to increase sales for company 2 Solution Exclusive dealing arrangements
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