The manager of Steel Works learns of a new technological interdependency between the final stage of production and the distribution of the final product. Steel Works currently contracts with another firm to distribute the product. If Steel Works vertically integrates with the distributor firm, which of the following is true?
A)Steel Works is likely to incur managerial diseconomies as a result of an increase in the complexity of the firm.
B)With certainty, the combined firm will earn greater economic profits.
C)Steel Works will automatically create an internal successive monopoly.
D)Steel Works will not incur managerial diseconomies.

Question

Quizplus · Accepted Answer

Vertical integration can increase the complexity of the firm and may lead to managerial diseconomies, such as difficulty in managing multiple stages of production and distribution. Therefore, Steel Works is likely to incur managerial diseconomies as a result of integration. Choices B, C, and D are incorrect as they are not necessarily true and/or do not address the issue of managerial diseconomies.

The Manager of Steel Works Learns of a New Technological