MGEC40H3 Lecture Notes - Agency Cost, Vertical Integration, Monopsony
24 Jun 2014
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Document Summary
The production of any good or service usually requires a wide range of activities organized in a vertical chain. Production activities are said to flow from upstream suppliers of raw inputs to downstream manufacturers, distributors and retailers. Activities in the chain include processing and handling activities, which are associated directly with the processing and distribution of inputs and outputs, and professional support activities, such as accounting and planning. You should go over these and make sure that you understand each. The solution to the make-or-buy decision depends on which decision leads to the most efficient production. This is determined by assessing the benefits and costs of using the market and that of using the firm. Keeping activities internally may lead to agency costs, and influence costs, but the firm may benefit if there are scale or scope economies or learning curve or if the firm has propriety knowledge.
