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Chapter 19 - Vertical Integration and Outsourcing

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Chapter 19 - Vertical Integration and Outsourcing
Chapter 19 - Vertical Integration And Outsourcing

CHAPTER 19 VERTICAL INTEGRATION AND OUTSOURCING

CHAPTER SUMMARY This chapter analyzes the vertical boundaries of the firm. It begins by defining the vertical chain of production. The benefits of acquiring inputs through competitive markets (when they exist) is stressed. Reasons for nonmarket transactions (vertical integration and long-term contracting) are introduced. The choice between long-term contracts and vertical integration is analyzed with attention focused on the importance of firm-specific investment in affecting this decision. Other major topics include: choosing the length of a contract, contracting with distributors, and recent trends in outsourcing. The appendix provides a more detailed example of how ownership rights can affect investment incentives (in this case, investments in effort).

CHAPTER OUTLINE VERTICAL CHAIN OF PRODUCTION Managerial Application: Long-Term Contracts Managerial Application: Vertical Outsourcing by Taiwan Semiconductor Managerial Application: Outsourcing Logistics BENEFITS OF BUYING IN COMPETITIVE MARKETS Managerial Application: Merck and Astra—Joint Venture Managerial Application: Made in the USA REASONS FOR NONMARKET TRANSACTIONS Contracting Costs Firm-Specific Assets Managerial Application: Kodak-IBM Outsourcing Renewal Measuring Quality Controlling Externalities Extensive Coordination Market Power Managerial Application: Price Discrimination and Antitrust Law Taxes and Regulation Other Considerations VERTICAL INTEGRATION VERSUS LONG-TERM CONTRACTS Incomplete Contracting Ownership and Investment Incentives Managerial Application: Contracting Problems and Investment Incentives—Evidence from China Managerial Application: Renting and Asset Abuse Specific Assets and Vertical Integration Managerial Application: Owning versus Leasing Networks
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Chapter 19 - Vertical Integration And Outsourcing

Managerial Application: Lease versus Buy Managerial Application:
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