Vertical chain activities starting from acquisition of raw materials to the ... Maruti. Tata Steel. Visakhapatnam Steel Plant. Asian Paints. Hindalco. Infosys ...
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Technical efficiency meansuse of the least cost production process.
Agency efficiency means exchange of goods and services in the value chain to minimise coordination, agency and transaction costs.
The market is superior for minimising production costs.
Vertical integration is superior for minimising transaction costs.
Optimal vertical integration minimises the sum of technical and agency inefficiencies.
- The more the ability of outside specialists to take advantage of economies of scale and scope, the weaker the case for vertical integration
- Key questions :Are huge upfront set up costs involved? Is there a large market outside the firm?
- If the answers are yes, market exchange is preferable to vertical integration.
I = Investment,
P* = Captive (contracted) price
Pm = Market price
C = Variable cost
Q = Output
I + (Pm – C) Q = relationship specific investment
Rent = Q (P* - C) – I
Quasi Rent = Q (P* - Pm)