2410 - L3

Front 1

horizontal and vertical boundaries

Back 1

hor = size and scope
vert = which activites firm performs itself/which it leaves to the mkt

Front 2

vert integrated vs disintegrated

Back 2

perform all tasks in vertical chain inhouse

outsource

Front 3

upstream vs downstream

Back 3

early steps in pdn processes

later steps

Front 4

market firms

Back 4

outside specialists who can perform vertical chain tasks

benefits:
- econ of scale
- value of mkt discipline

costs:
- problems in coordinations of pdn flows
- possible leak of private info
- transaction costs

Front 5

make or buy fallacies

Back 5

1. firm should make (not buy) assets that provide competitive advantage to firm

2. outsourcing eliminates costs

3. making captures profit margin of market firms

4. vert integration insures against high input prices

5. making ties up distribution channel and denies access to rivals

Front 6

fallacy 1

Back 6

- if cheaper to buy, should buy
- if cheaper to buy, not competitive advantage to make

Front 7

fallacy 2

Back 7

- mkt firms pass cost onto firm
- relevant consideration is efficiency not costs

Front 8

fallacy 3

Back 8

mkt firms proft accounting or economic profit? --> competition in mkt erodes away econ profit

Front 9

fallacy 4

Back 9

long term (forward or futures) contracts can be used

Front 10

fallacy 5

Back 10

acquiring downstream supplier may cause monopoly and increase profits

HOWEVER:
3 possible limitations:
1. anti-trust laws
2. pay too much for monopoly power
3. competitors may open new distribution channels

may be successful if network of downstream firms acquired

Front 11

reasons to buy

Back 11

if mkt firms are more efficient!

mkt firms have 3 types of efficiency:
1. patents/proprietary info (low cost pdn possible)
2. can achieve econ of scale and learning econs
3. no need for bureaucracy (i.e. no agnecy costs/influence costs)

Front 12

agency costs and influence costs

Back 12

slacking

time wasted/resources consumed by influence activities/bad decisions

Front 13

5 reasons to make

Back 13

1. costs and difficulties in writing and enforcing contracts

2. coordination of pdn (timing, size, colour, sequence)
-> decisions depend in part on decisions made by other firms along vert chain

3. leakage of private info

4. transactions costs -> costs of using mkt that are saved by centralised direction (include contracts etc, opportunistic behaviour)

5. relnsp specific assets (assets essential for given transaction --> locks parties into relnsp)
-> causes fundamental transformation in relnsp

Front 14

4 types of specificity

Back 14

1. site/location

2. physical assets (may have to be designed specifically)

3. dedicated assets (made to satisfy single buyer)

4. human assets (workers may have to acquire specific skills/know how)

Front 15

fundamental transformation

Back 15

relnsp changes from large numbers of partners bargaining situation to small numbers of partners bargaining situation

Front 16

rent and quasi rent

Back 16

rent = econ profits

quasi = excess econ profit from transaction


! rent must be positive to induce firm to invest in asset
! quasi rent may lead to hold up problem, when firm tries to capture quasi rent for itself

if asset is NOT relnsp specific --> profit from firms best alt = next best alt (no hold up)

if IS relnsp specific, best alt may > next best alt (therefore quasi rent and hold up problem)