Which of the Following Conclusions Can We Make About Vertical

question 7

Multiple Choice

Which of the following conclusions can we make about vertical integration with regard to product market share and scope?
A. Firms should make an asset, rather than buy it, if that asset is a source of competitive advantage for the firm

• A)If asset specificity is significant enough, vertical integration will be more profitable than arm's-length market purchases, even when production of the input is characterized by strong scale economies or when the firm's product market scale is small.
• B)A firm gains more from vertical integration when outside market specialists are better able to take advantage of economies of scale and scope
• C)A firm with a larger share of the product market will benefit more from vertical integration than a firm with a smaller share of the product market
• D)The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-house production can take as much advantage of economies of scale and scope as an outside market specialist
• E)If a firm is considering whether to make or buy an input requiring significant up-front setup costs, and there is a large market outside the firm for the input, then the firm should buy the input from outside market specialists.

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Definitions:

Market Price

Market price is the current price at which an asset or service can be bought or sold in a given market.

Underwriter

A financial specialist or institution that evaluates and assumes the risk of another party's financial products, often seen in insurance and securities.

Offering Price

The price at which shares of a company are made available for sale to the public during an initial public offering (IPO) or secondary offering.

Market Price

The current financial value at which an asset or service can be acquired or disposed of in the market.