Question 1

Which of the following conclusions can we make about vertical integration with regards to product market share and scope?
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 multiple product lines will benefit more from being vertically integrated in the production of components for those products in which it can achieve significant market scale
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

Accepted Answer

C

Question 2

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.

Accepted Answer

C

Question 3

Which of the following conclusions can we make about vertical integration with regards to asset specificity?
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

Accepted Answer

This conclusion states that vertical integration can be more profitable than arm's-length purchases even in cases of strong scale economies and small product market scales if asset specificity is significant enough.

Question 4

What term describes when a firm has minimized the extent to which the exchange of goods and services in the vertical chain has been organized to minimize coordination,agency and transaction costs?
A)Agency efficiency
B)Technical efficiency
C)Lean compliant
D)Economizing
E)Six sigma compliant

Accepted Answer

The answer of What term describes when a firm has...

Question 5

Suppose we have two firms (Firm 1 & Firm 2)enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where Firm 2 owns the assets of Firm 1?
A)Backward Integration
B)Forward integration
C)Nonintegration
D)Contractually unbound
E)Contractually bound

Accepted Answer

Backward integration occurs when a downstream firm acquires or merges with an upstream firm. In this case, Firm 2 (downstream) owns the assets of Firm 1 (upstream), which fits the definition of backward integration.

Question 6

What happens when the process by which governance develops exhibits path dependence?
A)Governance arrangements split decision rights and controls between two related firms
B)Governance arrangements are optimal
C)Past circumstances could exclude certain possible governance arrangements in the future
D)The firm will split into two entities to reduce the governance issues created
E)The governance will form effectively

Accepted Answer

When the process of governance development exhibits path dependence, certain possible governance arrangements may be excluded in the future due to past circumstances. Path dependence means that the choices made in the past determine the available options in the future. Therefore, governance arrangements may not always be optimal and may be limited by past decisions. Option A and D are not relevant to path dependence. Option B is not necessarily true as path dependence can limit optimal arrangements. Option E is too broad and not specific to the effects of path dependence.

Question 7

According to the GHM Theory,the choice between an in-house sales force versus independent agents should turn on the relative importance of investments in developing persistent clients by the agent versus list-building activities by the insurance firm.What would GHM thus predict about the sales of whole life versus term life insurance?
A)Both would be sold by the insurance company's in-house sales force
B)Whole life would be sold by the insurance company's in-house sales force; term by an independent agent
C)Whole life would be sold by an independent agent; term by the insurance company's in-house sales force
D)Both would be sold by an independent agent
E)An insurance company would try to "buy" the business (whole and term life insurance)of its independent agents

Accepted Answer

GHM Theory suggests that when the sales process requires significant investment in developing persistent clients, an in-house sales force is preferred due to better alignment of incentives and control. Whole life insurance, which involves long-term relationships and complex products, fits this criterion. Term life insurance, being simpler and requiring less ongoing client management, can be effectively sold through independent agents.

Question 8

Which of the following is not a benefit of tapered integration?
A)It expands the firm's input and/or output channels without requiring substantial capital outlays
B)Allows the firm to use information about the cost and profitability of its internal channels to help negotiate contracts with independent channels
C)Lets the firm motivate its internal channels by threatening to expand outsourcing and, at the same time, motivate its external channels by threatening to produce more in-house.
D)Allows the firm to produce most efficiently in all circumstances
E)Helps the firm protect itself against holdup by independent input suppliers

Accepted Answer

Tapered integration does not guarantee that the firm will produce most efficiently in all circumstances as it may face unforeseen challenges or changes in the market that affect its integrated channels.

Question 9

Why are the current health care systems on the rise being built around the integration of clinical information technology and disease management systems?
A)They both have high costs
B)They both are new trends in health care
C)They are easy to integrate
D)They do not require a significant investment to integrate
E)They both require asset specificity and coordination

Accepted Answer

The integration of clinical information technology and disease management systems requires asset specificity and coordination, meaning that specialized resources and efforts are needed to integrate these systems effectively. This integration is seen as a necessary step to improve the quality of care and reduce healthcare costs. Therefore, the rise of healthcare systems built around this integration is likely due to its potential benefits for patient care and efficiency in healthcare delivery.

Question 10

What term describes when a firm is using the least-cost production process?
A)Agency efficiency
B)Technical efficiency
C)Lean compliant
D)Economizing
E)Six sigma compliant

Accepted Answer

Technical efficiency refers to a situation where a firm is using the least amount of inputs to produce a given level of output, or equivalently, producing the maximum output from a given set of inputs, which aligns with the concept of using the least-cost production process.

Question 11

Suppose we have two firms (Firm 1 & Firm 2)enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where the two firms are independent,each with control over its own assets?
A)Backward Integration
B)Forward integration
C)Nonintegration
D)Contractually unbound
E)Contractually bound

Accepted Answer

The term that best describes the organization of the transaction where the two firms are independent and each with control over its own assets is nonintegration. This means that the firms are not integrated with each other and do not have any ownership or control over each other's assets or operations. They are simply engaging in a transaction as independent entities. This is also known as an arms-length transaction.

Question 12

For what critical aspect of drug development has research (Azoulay & Henderson)shown that major drug houses have chosen tapered integration?
A)Clinical Research
B)Drug Development
C)Marketing
D)Sales
E)Manufacturing

Accepted Answer

The answer of For what critical aspect of drug development...

Question 13

Which of the following is true with regard to the difference in exchange costs between an item produced internally firm and an item purchased from an outside supplier through an arm's length market transaction as the level of asset specificity increases?
A)The cost difference is positive for both low and high levels of specificity
B)The cost difference is negative for both low and high levels of specificity
C)The cost difference is negative for low and positive for high levels of specificity
D)The cost difference is positive for low and negative for high levels of specificity
E)As asset specificity increases, the transaction costs of the market exchange decrease

Accepted Answer

As asset specificity increases, the cost difference between producing internally and purchasing from an outside supplier through an arm's length market transaction becomes more pronounced. For low levels of asset specificity, the cost difference is positive for producing internally due to economies of scale, but as asset specificity increases, the cost difference becomes negative for producing internally due to the higher cost of specialized assets and the need for more coordination between departments. Therefore, the cost difference is positive for low and negative for high levels of asset specificity.

Question 14

Which of the following is true with regard to the difference in production costs between an item produced in a vertically integrated firm and an item exchanged through an arm's length market transaction as the level of asset specificity increases?
A)The cost difference increases with greater asset specificity
B)Scale-based advantages of outside suppliers are likely to be stronger with greater asset specificity
C)The cost difference declines with greater asset specificity
D)Scope-based advantages of outside suppliers are likely to be stronger with greater asset specificity
E)The costs are negative for all levels of asset specificity

Accepted Answer

The answer of Which of the following is true with...

Question 15

Which of the following in the late 19ᵗʰ century was predicted by the asset-specificity hypothesis?
A)Forward integration was most likely to occur for products that require specialized investments in human capital
B)Increases in the size of manufacturing firms led to independent wholesale and marketing agents losing scale/scope cost advantages and in turn led to manufacturers forward integrating into marketing and distribution
C)Forward integration was most likely to occur for products that do not require specialized investments in equipment and facilities
D)For industries with small manufacturers, marketing relied on specialized assets
E)For industries with small manufacturers, distribution relied on specialized assets

Accepted Answer

The answer of Which of the following in the late...

Question 16

Which of the following conclusions can we make about vertical integration with regard to scale and scope economies?
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

Accepted Answer

The answer of Which of the following conclusions can we...

Question 17

What type of strategic alliance involves two or more firms creating and together owning a new independent organization?
A)Partnership
B)Tapered integration
C)Close-knit semi-formal relationship
D)Mutual agreement
E)Joint venture

Accepted Answer

A joint venture involves two or more firms creating a new independent organization together, and the ownership is shared between the parties involved.

Question 18

What concept describes the situation where the owner of an asset grants another party the right to use that asset,but the owner retains all controlling rights that are not explicitly stipulated in the contract?
A)Asset specificity
B)Non-contract rights of ownership
C)Control rights agreement
D)Residual rights of control
E)Coordination

Accepted Answer

This concept is known as residual rights of control, where the owner of the asset retains all controlling rights that are not explicitly granted to the other party in the contract. This means that the owner still has the ultimate decision-making power over the asset, even though another party has the right to use it.

Question 19

Suppose we have two firms (Firm 1 & Firm 2)enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where Firm 1 owns the assets of Firm 2?
A)Backward Integration
B)Forward integration
C)Nonintegration
D)Contractually unbound
E)Contractually bound

Accepted Answer

The answer of Suppose we have two firms (Firm 1...

Question 20

Which of the following in the late 19ᵗʰ century was predicted by the firm-size hypothesis?
A)Forward integration was most likely to occur for products that require specialized investments in human capital
B)Increases in the size of manufacturing firms led to independent wholesale and marketing agents losing scale/scope cost advantages and in turn led to manufacturers forward integrating into marketing and distribution
C)Forward integration was most likely to occur for products that do not require specialized investments in equipment and facilities
D)For industries with small manufacturers, marketing relied on specialized assets
E)For industries with small manufacturers, distribution relied on specialized assets

Accepted Answer

The firm-size hypothesis predicts that there are scale/scope cost advantages associated with larger firms in terms of marketing and distribution. Therefore, as manufacturing firms grow larger, they are more likely to forward integrate into marketing and distribution to capture these advantages. This aligns with option B.

Quiz 6: Organizing Vertical Boundariesvertical Integration and Its Alternatives

Which of the following conclusions can we make about vertical integration with regards to product market share and scope?

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

Which of the following conclusions can we make about vertical integration with regards to asset specificity?

What term describes when a firm has minimized the extent to which the exchange of goods and services in the vertical chain has been organized to minimize coordination,agency and transaction costs?

Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where Firm 2 owns the assets of Firm 1?

What happens when the process by which governance develops exhibits path dependence?

Which of the following is not a benefit of tapered integration?

Why are the current health care systems on the rise being built around the integration of clinical information technology and disease management systems?

What term describes when a firm is using the least-cost production process?

Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where the two firms are independent,each with control over its own assets?

For what critical aspect of drug development has research (Azoulay & Henderson) shown that major drug houses have chosen tapered integration?

Which of the following is true with regard to the difference in exchange costs between an item produced internally firm and an item purchased from an outside supplier through an arm's length market transaction as the level of asset specificity increases?

Which of the following is true with regard to the difference in production costs between an item produced in a vertically integrated firm and an item exchanged through an arm's length market transaction as the level of asset specificity increases?

Which of the following in the late 19ᵗʰ century was predicted by the asset-specificity hypothesis?

Which of the following conclusions can we make about vertical integration with regard to scale and scope economies?

What type of strategic alliance involves two or more firms creating and together owning a new independent organization?

What concept describes the situation where the owner of an asset grants another party the right to use that asset,but the owner retains all controlling rights that are not explicitly stipulated in the contract?

Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where Firm 1 owns the assets of Firm 2?

Which of the following in the late 19ᵗʰ century was predicted by the firm-size hypothesis?