Chapter 14 vertical integration and the scope of the firm (349-365) Transaction costs and the scope of the firm. Technical economies from the physical integration of processes y costs arising from physical integration reduced transportation and energy costs y however, this only explains the need for co-location; not common ownership y better answer might be If a product is a commodity and a market price is available and switching costs are low, more likely not to be vertically integrated. Pros/cons of vertical integration y see table 14. 1 on p. 361. Difference types of vertical relationships y types are classified according to 2 characteristics (see fig. 14. 4 on p. 362): extent to which buyer/seller commit resources to the relationship, formality of the relationship y spot contracts y. Long-term contracts y vendor partnerships y franchising y relationships y hybrid arrangements. Choosing between alternative vertical relationships y resources, capabilities, strategy what is the company good at? y allocation of risk y.