Deck 3: The Vertical Boundaries of the Firm

Question 1

What primary agency cost problem plagued the partnership between Sony's hardware and software from 1998-2008 with regards to digital music?

A) High infrastructure costs
B) Contract disputes
C) High transaction costs
D) Overlapping distribution channels
E) Manager/worker slacking

Answer 1

E

Question 2

Under what circumstance would it be logical to leave contracts vague and open-ended?

A) When performance may be ambiguous or difficult to measure.
B) When one of the firms in the contract is much larger than the other firm
C) If there are many other firms that can provide the same service or product
D) When the cost of writing the contract is too high
E) If the smaller of the two contracting firms is the upstream firm

Answer 2

A

Question 3

Which of the following is a true argument regarding the make-or-buy decision process?

A) Firms should make an asset, rather than buy it, if that asset is a source of competitive advantage for the firm
B) Firms should buy, rather than make, to avoid the costs of making the product
C) Firms should make, rather than buy, to avoid paying a profit margin to independent firms
D) Firms should buy, rather than make, in general, because market firms are subject to the discipline of the market and must be efficient and innovative to survive
E) Firms should make, rather than buy, because a vertically integrated producer will be able to avoid paying high market prices for the input during periods of peak demand or scarce supply

Answer 3

D

Question 4

Which of the following issues makes it difficult for to managers to reign in dedicated "cost centers" in a firm?

A) Cost centers have no dedicated "customer"
B) Cost centers are easy to judge against market counterparts performing similar functions
C) Firms are unwilling to endure the ill will generated by firing unproductive elements in an organization
D) Firms are always looking to cut costs when they retain an advantage insulting it from the market
E) Managers of costs centers have significant latitude to complete their jobs

Question 5

Which of the following processes is most representative of a less integrated firm on the "buy" end of the make-or-buy continuum?

A) Arm's length market transactions
B) Long-term contracts
C) Strategic alliances and joint ventures
D) Parent/subsidiary relationships
E) Parent/subsidiary relationships

Question 6

What are agency costs?

A) Costs of the sales force
B) Costs associated with slack effort and with the administrative controls to deter it
C) Costs related to general and administrative expenses
D) Costs associated with outsourcing of firm functions
E) Costs attributed to the use of professional service firms

Question 7

Which of the following is not a characteristic of a complete contract?

A) The contract allows for a party to exploit weaknesses in another party's position as the transaction unfolds
B) Elimination of opportunistic behaviors
C) Stipulation of each party's responsibilities and rights
D) Binding instruction for each party on courses of action as the transaction unfolds
E) Must be enforceable

Question 8

Which of the following is a reason for a firm to Buy rather than make?
a) To eliminate competition among upstream suppliers
b) Upstream firms aggregate the demands of many buyers and provide economies of scale.
c) To prevent downstream competitors from reducing their prices
d) Tax advantages for purchasing upstream rather than making internally
e) None of the above

Question 9

The biotechnology industry is seeing a broad pattern of disintegration due to the fact that big pharma companies are less and less doing which of the following core functions?

A) Infrastructure
B) Product innovation
C) Obtaining regulatory approval
D) Customer relationship
E) Manufacturing and communications

Question 10

When contracts are incomplete,what must be well defined and enforceable to allow for smooth transactions to occur?

A) Contract performance measures
B) Contract roles
C) Contract costs
D) Contract triggers
E) Contract law

Question 11

Which of the following has a downstream relationship with a Toyota Motor Corporation?

A) Steel manufacturers
B) Tire companies
C) Dealerships
D) Paint producer
E) Car parts manufacturer

Question 12

What is a market firm?

A) Firm representing a particular industry
B) Financial firm
C) Subsidiary of the larger parent firm
D) Large scale firm
E) An independent outsourcing partner

Question 13

What is a reason that companies might want to "buy" instead of "make" talent from the market when looking to acquire employees with a particular skill set?

A) External training methods are better than internal ones
B) Companies are always willing to pay more for external employees
C) External training is more advanced (up-to-date) than internal
D) Scale economies can result in fixed education costs while in house education methods may be more expensive
E) Externally trained employees are more likely to become better business leaders

Question 14

Which of the following is not a method a firm could use to force vertical foreclosure?

A) Downstream monopolist acquires upsteam supplier and refuses to buy from other suppliers
B) Upsteam monopolist acquires downstream firm and refuses to sell to other downstream firms
C) Competitive downstream firm acquires upstream monopolist and refuses to sell to downstream firms
D) Upstream competitor acquires downstream competitor and refuses to buy from other suppliers
E) Competitive upstream firm acquires downstream monopolist and refuses to buy from other suppliers

Question 15

Which of the following is a method firms can use to counteract price fluctuations and eliminate income risk?

A) Manufacture all needed inputs internally
B) Acquire upsteam firms in the vertical chain
C) Enter into futures contracts to hedge the price of raw materials
D) Eliminate competitors by under-cutting their price
E) None of the above

Question 16

What problem preventing complete contracts refers to a lack of transparency/equal access to the details surrounding a contract?

A) Agency costs
B) Bounded rationality
C) Performance measurement difficulties
D) Asymmetric information
E) Contract body of law

Question 17

Which of the following processes is most representative of a vertically integrated firm on the "make" end of the make-or-buy continuum?

A) Arm's length market transactions
B) Long-term contracts
C) Strategic alliances and joint ventures
D) Parent/subsidiary relationships
E) Perform activity internally

Question 18

What do the vertical boundaries of a firm refer to?

A) The activities the firm itself performs versus purchases from independent firms
B) The level of expertise of the firm's workforce
C) The breadth of products a firm produces
D) The production output level for a firm
E) The chain of production processes from raw materials to finished good

Question 19

What problem preventing complete contracts refers to the limits on the capacity of individuals to process information,deal with complexity and pursue rational aims?

A) Agency costs
B) Bounded rationality
C) Performance measurement difficulties
D) Asymmetric information
E) Contract body of law

Question 20

What are influence costs?

A) Costs associated with slack effort and with the administrative controls to deter it
B) The cost of activities aimed at affecting the distribution of benefits in an organization
C) Costs related to the negotiation of external contracts
D) Costs of recruiting ("buying") outside employees with a particular skill set
E) The costs of advertising to customers

Question 21

Which of the following is not a method to protect intellectual property?

A) Patents that are specific and complete
B) Complete contracts regarding IP with all suppliers
C) Non-disclosure agreements for employees
D) Limiting access to IP to a few key employees
E) Charging higher prices to limit access to IP

Question 22

Which of the following is not a result of the holdup problem?

A) More difficult contract negotiations and more frequent renegotiations
B) Investments to improve ex post bargaining positions
C) Reduction in the transaction costs of arm's length market exchanges
D) Distrust
E) Reduced investment in relationship-specific investments

Question 23

Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers.Suppose your average variable cost C=$20/unit,annualized cost of investment to build a hard drive factory I=$30 million,and the market price (bailout market price in the event Dell does not buy)Pm=$22/unit.If Dell agrees to purchase the 10 million hard drives at a price P*=$25/unit and the deal subsequently falls apart,what is your company's "quasi-rent"?

Question 24

Which of the following types of fit (used to aide in coordination along all dimensions of production)explains a situation where the steps of a particular process must occur in a particular order?

A) Timing fit
B) Size fit
C) Color fit
D) Sequence fit
E) Price fit

Question 25

Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers.Suppose your average variable cost C=$20/unit and annualized cost of investment to build a hard drive factory I=$30 million.If Dell agrees to purchase the 10 million hard drives at a price P*=$25/unit,what is your company's "rent?

Question 26

What term describes features that need to relate to each other in a precise fashion otherwise they lose a significant portion of their economic value?

A) Design attributes
B) Critical components
C) Contract factors
D) Coordination factors
E) Relationship attributes

Question 27

Which of the following asset specificity forms describes why glass container production requires molds custom tailored to particular container shapes and glass making machines?

A) Site specificity
B) Physical asset specificity
C) Dedicated assets
D) Human asset specificity
E) The fundamental transformation

Question 28

Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers.Suppose your average variable cost C=$20/unit,annualized cost of investment to build a hard drive factory I=$30 million,and the market price (bailout market price in the event Dell does not buy)Pm=$22/unit.If Dell agrees to purchase the 10 million hard drives at a price P*=$25/unit and subsequently renegotiates to only purchase for $22.50/unit,what has Dell increased its own profits by?

Question 29

Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers.If your average variable cost C=$20/unit,annualized cost of investment to build a hard drive factory I=$30 million,and market price (bailout market price in the event Dell does not buy)Pm=$22/unit,what is your company's RSI (relationship specific investment)?

Question 30

Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers.Suppose your average variable cost C=$20/unit,annualized cost of investment to build a hard drive factory I=$30 million,and the market price (bailout market price in the event Dell does not buy)Pm=$22/unit.If Dell agrees to purchase the 10 million hard drives at a price P*=$25/unit and subsequently renegotiates to only purchase for $22.50/unit,what is your company's new "rent"?