SOLUTIONS

Economic Analysis

Economic Analysis

Past Papers

Question No 1 A

Asset specificity is related to the notion of sunk costs (sunk costs), and a complete branch becomes evident only in the context of incomplete contracts. They occur in a context of inbetweenness and refer to the degree to which assets can be re-employed in uses and by alternative users without sacrifice of productive value. That is, when one chooses a transaction type is necessary to evaluate the degree to which assets can be re-applied without loss of value in other projects in the case of contracts being broken. This condition was seen originally by Alfred Marshall in his discussion of quasi-rents.The specifics of assets may exist in several categories: spatial specificity, physical asset specificity, human asset specificity and specificity of the brand.

Specific Assets & Its Relation to Vertical Integration

The specific assets to Williamson constitute the main factor in the decision of vertical integration. The existence of substantial specific assets, combined with a transactional environment complex and uncertain, make the costs of negotiating and implementing contracts prohibitively high for those long-term contracts where you specify all obligations under all circumstances. Thus, given the degree of asset specificity, the cost of management define the choice between vertical integration and contractual exchange. If asset specificity is low, the exchange contract is preferable, and when asset specificity is strong, vertical integration is most appropriate.

Question No 1 B

Scale & Scope Economies

Generally it is that companies can gain a competitive advantage through economies of scale and economies of scope and vertical integration. Vertical integration involves expanding business area either before or backward in relation to current affairs, the production chain to sale. Vertical integration, or extension activities previously performed by suppliers or customers, involving at least theoretically increase profitability, but not necessarily a recipe. This type of strategy can be very profitable in some industries and not in others, may lead to lower profitability under certain conditions. At company level, we can consider profitability to be integrated degree makes taking firm can improve the profitability and share of new activity in turnover to estimate increased profitability through integration.

Vertical integration of the firm, integrating suppliers or customers, thus leading to increased complexity of business conducted. Thus, this process must take into account the problems of financing the operation, integration of new business processes, developing management skills and implementation of vertical development strategy. Through vertical integration, a firm can hope to achieve economies of scale and scope, reduce costs, increase competitiveness and increased control over the acquisition of businesses that unfolds. Given that vertical integration advantages and risks, the choice for this strategy should be based on realistic assessment of the chances of success in relation following criteria:

compatibility of such strategic options the firm's mission and its long-term objectives;

strengths and weaknesses that you have company, insofar as they allow the strategy of vertical integration;

increase the competitive strength that the company acquires in the industry by implementing the strategy;

competitive advantages it generates ...