Question

Some firms have engaged in backward vertical integration strategies in order to appropriate the economic profits that would have been earned by suppliers selling to them. How is this motivation for backward vertical integration related to the opportunism logic for vertical integration described in this chapter? (Hint: Compare the competitive conditions under which firms may earn economic profits to the competitive conditions under which firms will be motivated to avoid opportunism through vertical integration).

Answer 1

Answer1:

Take the case of AN automaker World Health Organization is presently sourcing, say, rear-view mirrors from an out of doors provider. It’s clear to the manufacturer that the mirror provider is creating monumental profits during these dealings. Now, let’s say that the manufacturer is creating a brand new sort of vehicle that needs a considerably new sort of mirror. The mirror manufacturer should create a major transaction-specific investment for this deal. The automaker is unlikely to urge the mirror manufacturer to form the investment for worry of opportunist behavior by the automaker. The automaker will currently avoid expedience and increase its profits by vertically group action into creating its own mirrors. However, the opposite explanations for consolidation (capabilities and flexibility) should even be factored into this call.