cob 487: midterm question 15: transaction costs and vertical integration

a) what are the origins of a modern corporation

1. technology (19th century shift from home to factory and development of transportation expanded size of market) 2. limited liability

h) what is the example of Harry Potter vs Frozen about

degree of VI HP did not do VI basically outsourced everything where everything was VI for Frozen because of Disney

g) using the example of an oil + gas company, what would be its forward and backward vertical integration

forward = buying gas station (closer to customer) backward = extracting oil (towards suppliers)

when does it make sense to encompass an economic activity within a firm and when not

in a firm: transaction costs > admin costs outsource: transaction costs < admin cost

b) what is an alternative to a firm

market

d) what do transaction and administrative costs include

transaction: search, negotiation, make contracts, enforce contracts admin (internalized within firm): HR and accounting

f) what are key considerations of vertical integration vs outsourcing

VI avoids transaction costs and has more coordination but downside is managing different businesses and lack of flexibility

e) what is vertical integration

a firm's ownership and control of multiple vertical stages in the supply of a product; forward = towards customer, backwards = away from customer