If All of the Divisions in a Vertically Integrated Firm

question 32

Multiple Choice

If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?

• A) Divisions that produce parts for other divisions have effective monopoly power, so the outcome for these division must be inefficient.
• B) This outcome is no longer possible in the U.S. after passage of the Sarbanes-Oxley law.
• C) Vertically integrated firms are often subject to antitrust investigations, so managers routinely limit the amount of information that flows between divisions.
• D) Managers in some divisions may not have information about production capacities or costs in related divisions.

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Definitions:

Duress

a situation where a person is compelled to act against their will or make a contract under pressure or threats, rendering the agreement potentially voidable.

Legal Consent

Agreement given based on a clear understanding of the facts and implications, recognized as valid by law.

Threat

An expression of an intention to inflict pain, injury, damage, or other hostile action on someone in retribution for something done or not done.

Fraud

A wrongful or criminal deception intended to result in financial or personal gain.