A Firm's Horizontal Boundaries

Horizontal boundaries-

Mainly the firms horizontal boundaries are meant to identify the quantities and varieties of products and services that it produces.

Economies of scale and scope come from mainly few reasons like-Inventories, Increased productivity of variable inputs

Sources for economies of scale and scope-

1-Economies of scale and scope in purchasing

2-Economies of scale and scope in advertising

3-Economies of scale and scope in research and development

Vertical integration is more attractive when the ability of outside market specialists relative to the firm itself to achieve scale or scope, the larger the scale of the firm.

Benefits and cost of using the market

1) Market firms can achieve economies of scale that in-house departments only for their own needs.

2) Market firms are subject to discipline in the markets and should be efficient and innovative.

3) There may be many kinds of cost involved like the transaction cost(costs of using the market that are saved by centralized direction), inventories, labor cost and so on.

Vertical integration changes the pattern of asset ownership and control and also alters the bargaining power between parties in a vertical relationship. This will be more attractive when there are large asymmetries in the importance of relationships.

Competitive advantage-

Building a competitive advantage based on differentiation position is likely to be attractive when there are unexploited opportunities for achieving scale, scope, and learning.

There are different types of approaches to estimate firm’s benefit position.

2) Conjoint analysis

3) Attribute rating method

Firms can also be bound together in cooperative relationships in long lasting networks. The long te...

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...ghts (rights not specified in contracts).

• Vertical integration transfers the residual rights of control to the firm.

• With complete contracts it does not matter who owns the assets in the vertical chain.

Governance and Vertical Integration

• Use of market firms entails contracting inefficiencies

• Vertical integration replaces contracting with governance

• Delegation of decision rights & control of assets occur within the firm instead of between firms.

• Poor governance may nullify the benefits of vertical integration

• Post-merger conflicts may not allow cooperation between managers of the acquiring and the

Acquired firm

Alternatives to Vertical Integration-

1. Tapered integration (making some and buying the rest)

2. Joint ventures and strategic alliances

3. Semi-formal collaborative relationships based on long term implicit contracts between firms