ECON2410 Lecture Notes - Lecture 3: Vertical Integration, Transaction Cost, Profit Margin
3 Aug 2018
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Lecture 3: the vertical boundaries of the firm (part a) Vertical boundaries activities that define what the firm performs itself as opposed to purchasing from independent firms in the market. Is the process that begins with the acquisition of raw materials and ends with the distribution and sales of finished goods and services. Make means that the firm performs the activity itself. Buy the firm relies on an independent firm to perform the activity, perhaps under contract. The make-or-buy decision is not to eliminate steps from the vertical chain, is to decide which firms should perform which steps. Less integrated: arm"s-length market transactions (in which the buyers and sellers of a product act independently and have no relationship to each other), long-term contracts. Vertical coordination: strategic alliances and joint ventures. More integrated: parent/subsidiary relationships, perform activity internally. Example of upstream process in the oil industry: locating underground oil reserves, extraction wells.
