WPC 480 Final Exam Questions With
Complete Solutions
Vertical Integration The process in which several steps in the production and/or
distribution of a product or service are controlled and owned by a single company or entity, in
order to increase that company's or entity's power in the marketplace
Forward Integration Integrating steps that are further forward in the process
Ex. concentrate producers integrating bottling
Backward Integration Integrating steps that are further back in the production process
Ex. Hermes - getting a crocodile farm to supply own leather
Boundaries of the firm Why does a firm exist and to what extent should the firm expand?
Transaction Cost Economics Helps explain and predict boundaries of the firm
, WPC 480 Final Exam Questions With
Complete Solutions
Transaction costs the costs associated with activities that are not directly productive but
are engaged in only as a consequence of the need to coordinate exchange among the parties of a
transaction
Internal transaction costs Recruiting and retaining employees
Paying salaries and benefits
Setting up a shop floor
Providing office space and computers, etc.
External Transaction Costs Searching for a firm individual to contract with
Bargaining, negotiating, haggling cost
Monitoring, measuring, supervising, enforcing or policing performance
, WPC 480 Final Exam Questions With
Complete Solutions
External transaction costs arise primarily as a result of: Opportunism
Asset Specificity
Opportunism Willingness of at least some people to take advantage of others
Dishonesty
Threat of Opportunism Greatest when there is an asset specificity problem
(i.e. transaction specific investment)
Asset Specificity Unique assets with high opportunity cost - significantly more value in
their intended us than in their next-best use
Ex. site specificity, physical asset specificity, human asset specificity
, WPC 480 Final Exam Questions With
Complete Solutions
Asset Specificity Examples Oil refinery & oil pipeline
Auto parts & auto assembly
Benefits of vertical integration: Reduces opportunism
Facilitates investments in specialized assets
Facilitates scheduling and planning
Secures critical supplies and distribution channels
Leverage R&Cs
Uses fiats and authority
Risks of Vertical Integration Integration costs
Complete Solutions
Vertical Integration The process in which several steps in the production and/or
distribution of a product or service are controlled and owned by a single company or entity, in
order to increase that company's or entity's power in the marketplace
Forward Integration Integrating steps that are further forward in the process
Ex. concentrate producers integrating bottling
Backward Integration Integrating steps that are further back in the production process
Ex. Hermes - getting a crocodile farm to supply own leather
Boundaries of the firm Why does a firm exist and to what extent should the firm expand?
Transaction Cost Economics Helps explain and predict boundaries of the firm
, WPC 480 Final Exam Questions With
Complete Solutions
Transaction costs the costs associated with activities that are not directly productive but
are engaged in only as a consequence of the need to coordinate exchange among the parties of a
transaction
Internal transaction costs Recruiting and retaining employees
Paying salaries and benefits
Setting up a shop floor
Providing office space and computers, etc.
External Transaction Costs Searching for a firm individual to contract with
Bargaining, negotiating, haggling cost
Monitoring, measuring, supervising, enforcing or policing performance
, WPC 480 Final Exam Questions With
Complete Solutions
External transaction costs arise primarily as a result of: Opportunism
Asset Specificity
Opportunism Willingness of at least some people to take advantage of others
Dishonesty
Threat of Opportunism Greatest when there is an asset specificity problem
(i.e. transaction specific investment)
Asset Specificity Unique assets with high opportunity cost - significantly more value in
their intended us than in their next-best use
Ex. site specificity, physical asset specificity, human asset specificity
, WPC 480 Final Exam Questions With
Complete Solutions
Asset Specificity Examples Oil refinery & oil pipeline
Auto parts & auto assembly
Benefits of vertical integration: Reduces opportunism
Facilitates investments in specialized assets
Facilitates scheduling and planning
Secures critical supplies and distribution channels
Leverage R&Cs
Uses fiats and authority
Risks of Vertical Integration Integration costs
