Vertical Integration and Costs
Double marginalization
Occurs when both firms markup prices
Supply Chain
Process starting with raw materials, moving downstream to final goods.
Vertical integration
Producer integrates to change marginal cost
Pass through rate
Rate of wholesale price increase passed to consumers
Increased Costs of Vertical Integration
Rising costs due to expertise acquisition and managerial challenges.
Divestiture
Selling off business lines, often for antitrust approval.
Monopoly distributor
Sells to monopoly retailer
Notation
Symbols used to represent prices, costs, and demand in economic analysis.
Technological Interdependency
Technology requiring continuous input flow between production stages.
Forward Integration
Acquiring downstream productive capacity.
Backward Integration
Acquiring upstream productive capacity.
Apple Maps
Apple's navigation service developed after terminating Google Maps contract.
Transaction-Specific Asset
Asset dedicated to one purpose, not easily repurposed.
Assumptions
Basic premises for analysis, like constant marginal cost and no synergies.
Vertical Integration
Business strategy acquiring productive capacity upstream or downstream.
Retailer's marginal cost
Calculated as MC = PW + MCR
Vertical Entry
Entering another supply chain layer by purchasing assets like land.
Franchise fee
Fixed fee paid to manufacturer
Spot Markets
Immediate delivery markets without legal buyer-seller relationships.
Vertical foreclosure
Integrated firm restricts input to competitor
Contracts
Legal agreements specifying responsibilities between buyers and sellers.
Wholesale demand curve
Lies below retail demand curve by MCR
Resale price maintenance
Manufacturer restricts retail price
Perfectly Competitive Retail Market
Market structure where firms produce at P = MC for profit maximization.
Perfectly competitive retail distribution firms
Maximize profit by producing where P = MC
Vertical Merger
Merging with another firm at a different supply chain layer.
Non-linear pricing
Method to avoid double marginalization
Transaction Costs
Costs of using markets, including taxes and information costs.
Hold-Up Problem
When one party renegotiates terms after investment, affecting profits.
Derived Demand
Wholesale demand derived from retail demand, influenced by market structure.
Transfer Pricing
Within-firm price for transferred inputs affecting tax implications.
Outsourcing
Contracting outside suppliers for input production.
Synergies
Cost savings from eliminating duplicated services.
