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Chapter 13 - Vertical integration and the scope of the firm. This chapter presents the following content: Transactions costs and the scope of the firm, the costs and benefits of vertical integration, designing vertical relationships, recent trends. | Vertical Vertical Integration Integration and and The The Scope Scope ofof the the Firm Firm OUTLINE Transactions Costs and the Scope of the Firm --Why does the firm exist --The evolution of firms and markets The Costs and Benefits of Vertical Integration Designing Vertical Relationships Recent Trends From From Business Business Strategy Strategy to to Corporate Corporate Strategy Strategy The The Scope Scope of of the the Firm Firm Business Strategy is concerned with how a firm computes within a particular market Corporate Strategy is concerned with where a firm competes i.e. the scope of its activities The dimensions of scope are geographical scope vertical scope product scope Transactions Transactions Costs Costs and and the the Scope Scope of of the the Firm Firm Vertical Product Geographical Scope Scope Scope A Single V1 Integrated V2 P1 P2 P3 C1 C2 C3 Firm V3 B Several V1 Specialized P1 P2 P3 C1 C2 C3 V2 Firms linked by Markets V3 In situation A the business units are integrated within a single firm. In situation B the business units are independent firms linked by markets. Are the administrative costs of the integrated firm less than the transaction costs of markets Transactions Transactions Costs Costs and and The The Existence Existence of of the the Firm Firm Transaction cost theory explains not just the boundaries of firms also the existence of firms. In 18th century English woollen industry no firms independent spinners and weavers linked by merchants. Residential remodeling industry -- mainly independent self- employed builders plumbers electricians painters. Key issue -- transaction costs of the market vs. administrative costs of firms. Where transaction costs high firm is more efficient means of organization Note transaction costs cost of locating negotiating and enforcing a contract. Changes Changes in in Aggregate Aggregate Concentration Concentration Over Over Time Time Sales of 100 biggest cos. as of US industrial output 50 35 20 1930 1940 1950
