File: ch04, Chapter 4: Integration and its Alternatives

Multiple Choice

1. What term describes when a firm is using the least-cost production process?
a) Agency efficiency
b) Technical efficiency
c) Lean compliant
d) Economizing
e) Six sigma compliant

Ans: b

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Reflective Thinking
AICPA: Project Management
IMA: Cost Management

Heading: Technical Efficiency versus Agency Efficiency - Economizing

Level: Medium

2. What term describes when a firm has minimized the extent to which the exchange of goods and
services in the vertical chain has been organized to minimize coordination, agency and transaction costs?
a) Agency efficiency
b) Technical efficiency
c) Lean compliant
d) Economizing
e) Six sigma compliant

Ans: a

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Reflective Thinking
AICPA: Project Management
IMA: Cost Management

Heading: Technical Efficiency versus Agency Efficiency – Economizing

Level: Easy

3. The concept of who gets to control resources, make decisions and allocate profits is known as:
a) Matrix Management Outcome (MMO)
b) The Property Rights Theory (PRT)
c) Complete Contract Theory (CCT)
d) Total Production Model (TPM)
e) Resource Allocation Theory (RAT)

Ans: b

Learning Objective: Describe the governance arrangements that can help or hinder integration
AASCB: Reflective Thinking
AICPA: Leadership
IMA: Internal Controls

Heading: The Property Rights Theory of the Firm

Level: Easy

4. Which of the following is true with regard to the difference in production costs between an item
produced in a vertically integrated firm and an item exchanged through an arm’s length market
transaction as the level of asset specificity increases?
a) The cost difference increases with greater asset specificity
b) Scale-based advantages of outside suppliers are likely to be stronger with greater asset specificity
c) The cost difference declines with greater asset specificity
d) Scope-based advantages of outside suppliers are likely to be stronger with greater asset specificity
e) The costs are negative for all levels of asset specificity

Ans: c

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods

Heading: Technical Efficiency Versus Agency Efficiency – The Technical Efficiency/Agency Efficiency
Tradeoff and Vertical integration
Level: Hard

5. Which of the following is true with regard to the difference in exchange costs between an item
produced internally firm and an item purchased from an outside supplier through an arm’s length market
transaction as the level of asset specificity increases?
a) The cost difference is positive for both low and high levels of specificity
b) The cost difference is negative for both low and high levels of specificity
c) The cost difference is negative for low and positive for high levels of specificity
d) The cost difference is positive for low and negative for high levels of specificity
e) As asset specificity increases, the transaction costs of the market exchange decrease

Ans: d

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Analytic
AICPA: Measurement
IMA: Quantitative Methods

Heading: Technical Efficiency versus Agency Efficiency – The Technical Efficiency/Agency Efficiency
Tradeoff and Vertical Integration
Level: Hard

6. Which of the following conclusions can we make about vertical integration with regard to scale and
scope economies?
a) If asset specificity is significant enough, vertical integration will be more profitable than arm’s-length
market purchases, even when production of the input is characterized by strong scale economies or when
the firm’s product market scale is small.
b) A firm gains more from vertical integration when outside market specialists are better able to take
advantage of economies of scale and scope
c) A firm with a larger share of the product market will benefit more from vertical integration than a firm
with a smaller share of the product market
d) The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-
house production can take as much advantage of economies of scale and scope as an outside market
specialist
e) If a firm is considering whether to make or buy an input requiring significant up-front setup costs, and
there is a large market outside the firm for the input, then the firm should buy the input from outside
market specialists

Ans: e

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Analytic
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Technical Efficiency versus Agency Efficiency – The Technical Efficiency/Agency Efficiency
Tradeoff and Vertical Integration
Level: Medium

7. Which of the following conclusions can we make about vertical integration with regards to product
market share and scope?
a) If asset specificity is significant enough, vertical integration will be more profitable than arm’s-length
market purchases, even when production of the input is characterized by strong scale economies or when
the firm’s product market scale is small.
b) A firm gains more from vertical integration when outside market specialists are better able to take
advantage of economies of scale and scope
c) A firm with multiple product lines will benefit more from being vertically integrated in the production
of components for those products in which it can achieve significant market scale
d) The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-
house production can take as much advantage of economies of scale and scope as an outside market
specialist
e) If a firm is considering whether to make or buy an input requiring significant up-front setup costs, and
there is a large market outside the firm for the input, then the firm should buy the input from outside
market specialists

Ans: c

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Analytic
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Technical Efficiency versus Agency Efficiency – The Technical Efficiency/Agency Efficiency
Tradeoff and Vertical Integration
Level: Hard

8. Which of the following conclusions can we make about vertical integration with regard to product
market share and scope?
a) If asset specificity is significant enough, vertical integration will be more profitable than arm’s-length
market purchases, even when production of the input is characterized by strong scale economies or when
the firm’s product market scale is small.
b) A firm gains more from vertical integration when outside market specialists are better able to take
advantage of economies of scale and scope
c) A firm with a larger share of the product market will benefit more from vertical integration than a firm
with a smaller share of the product market
d) The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-
house production can take as much advantage of economies of scale and scope as an outside market
specialist
e) If a firm is considering whether to make or buy an input requiring significant up-front setup costs, and
there is a large market outside the firm for the input, then the firm should buy the input from outside
market specialists

Ans: a

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Analytic
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Technical Efficiency versus Agency Efficiency – The Technical Efficiency/Agency Efficiency
Tradeoff and Vertical Integration
Level: Hard

9. Which of the following in the late 19th century was predicted by the firm-size hypothesis?
a) Forward integration was most likely to occur for products that require specialized investments in
human capital
b) Increases in the size of manufacturing firms led to independent wholesale and marketing agents losing
scale/scope cost advantages and in turn led to manufacturers forward integrating into marketing and
distribution
c) Forward integration was most likely to occur for products that do not require specialized investments in
equipment and facilities
d) For industries with small manufacturers, marketing relied on specialized assets
e) For industries with small manufacturers, distribution relied on specialized assets

Ans: b

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Reflective Thinking
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Technical Efficiency versus Agency Efficiency – Real World Evidence

Level: Hard

10. Which of the following in the late 19th century was predicted by the asset-specificity hypothesis?
a) Forward integration was most likely to occur for products that require specialized investments in
human capital
b) Increases in the size of manufacturing firms led to independent wholesale and marketing agents losing
scale/scope cost advantages and in turn led to manufacturers forward integrating into marketing and
distribution
c) Forward integration was most likely to occur for products that do not require specialized investments in
equipment and facilities
d) For industries with small manufacturers, marketing relied on specialized assets
e) For industries with small manufacturers, distribution relied on specialized assets

Ans: a

Learning Objective: Discuss evidence that firms adhere to principles in vertical integration
AASCB: Reflective Thinking
AICPA: Strategic/critical Thinking
IMA: Business Applications

Heading: Technical Efficiency versus Agency Efficiency – Real World Evidence

Level: Hard

11. The reduction of co-ordination and hold-up problems depends on:

a) Governance arrangements
b) Manager contracts
c) Required quality of finished product
d) Cost of upstream vertical supplies
e) None of the above
Ans: a

Learning Objective: Describe the governance arrangements that can help or hinder integration
AASCB: Ethics
AICPA: Project Management
IMA: Internal Controls

Heading: Governance
Level: Easy

12. Why are the current health care systems on the rise being built around the integration of clinical
information technology and disease management systems?
a) They both have high costs
b) They both are new trends in health care
c) They are easy to integrate
d) They do not require a significant investment to integrate
e) They both require asset specificity and coordination

Ans: e

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Analytic
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Example 6.2 Gone in a Heartbeat: The Allegheny Health Education and Research Foundation
Bankruptcy
Level: Easy

13. What concept describes the situation where the owner of an asset grants another party the right to use
that asset, but the owner retains all controlling rights that are not explicitly stipulated in the contract?
a) Asset specificity
b) Non-contract rights of ownership
c) Control rights agreement
d) Residual rights of control
e) Coordination

Ans: d

Learning Objective: Explain what integration means

AASCB: Reflective Thinking
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Technical Efficiency versus Agency Efficiency – Vertical Integration and Asset Ownership
Level: Medium
14. The process by which governance develops is known as:
a) Vertical decision making (VDM)
b) Path Dependence
c) Internal design
d) Management evolution
e) Institutional learning

Ans: b

Learning Objective: Describe the governance arrangements that can help or hinder integration
AASCB: Ethics
AICPA: Leadership
IMA: Internal Controls

Heading: Path Dependence

Level: Easy

15. Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of
firm 2 in a vertical chain. What term best describes the organization of the transaction where the two
firms are independent, each with control over its own assets?
a) Backward Integration
b) Forward integration
c) Nonintegration
d) Contractually unbound
e) Contractually bound

Ans: c

Learning Objective: Explain what integration means

AASCB: Reflective Thinking
AICPA: Problem Solving and Decision Making
IMA: Decision Analysis

Heading: Technical Efficiency versus Agency Efficiency – Vertical Integration and Asset Ownership
Level: Medium

16. Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of
firm 2 in a vertical chain. What term best describes the organization of the transaction where Firm 1
owns the assets of Firm 2?
a) Backward Integration
b) Forward integration
c) Nonintegration
d) Contractually unbound
e) Contractually bound
Ans: b

Learning Objective: Explain what integration means

AASCB: Reflective Thinking
AICPA: Problem Solving and Decision Making
IMA: Decision Analysis

Heading: Technical Efficiency versus Agency Efficiency – Vertical Integration and Asset Ownership
Level: Medium

17. Which of the following causes finished goods prices not to maximize the joint profits of a
manufacturer and its supplier?
a) Inefficient asset specificity
b) Lack of coordinated scope economies
c) Incomplete contracting
d) Double marginalization
e) None of the above

Ans: d

Learning Objective: Explain what integration means

AASCB: Reflective Thinking
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Double Marginalization: A final Integration Consideration

Level: Medium

18. Which of the following describes when a manufacturer produces some of an input quantity itself and
purchases the remaining portion from independent firms?
a) Forward Integration
b) Tapered integration
c) Backward Integration
d) Balanced integration
e) Combined integration

Ans: b

Learning Objective: Explain what integration means

AASCB: Reflective Thinking
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Tapered Integration: Make and Buy

Level: Medium

19. Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of
firm 2 in a vertical chain. What term best describes the organization of the transaction where Firm 2
owns the assets of Firm 1?
a) Backward Integration
b) Forward integration
c) Nonintegration
d) Contractually unbound
e) Contractually bound

Ans: a

Learning Objective: Explain what integration means

AASCB: Reflective Thinking
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Technical Efficiency versus Agency Efficiency – Vertical Integration and Asset Ownership
Level: Medium

20. According to the GHM Theory, the choice between an in-house sales force versus independent agents
should turn on the relative importance of investments in developing persistent clients by the agent versus
list-building activities by the insurance firm. What would GHM thus predict about the sales of whole life
versus term life insurance?
a) Both would be sold by the insurance company’s in-house sales force
b) Whole life would be sold by the insurance company’s in-house sales force; term by an independent
agent
c) Whole life would be sold by an independent agent; term by the insurance company’s in-house sales
force
d) Both would be sold by an independent agent
e) An insurance company would try to “buy” the business (whole and term life insurance) of its
independent agents

Ans: b

Learning Objective: Identify alternatives to vertical integration

AASCB: Reflective Thinking
AICPA: Strategic/Critical Thinking
IMA: Business Applications

Heading: Example 6.3 Vertical integration of the Sales Force in the Insurance Industry
Level: Medium

21. What happens when the process by which governance develops exhibits path dependence?
a) Governance arrangements split decision rights and controls between two related firms
b) Governance arrangements are optimal
c) Past circumstances could exclude certain possible governance arrangements in the future
d) The firm will split into two entities to reduce the governance issues created
e) The governance will form effectively

Ans: c

Learning Objective: Describe the governance arrangements that can help or hinder integration
AASCB: Ethics
AICPA: Leadership
IMA: Internal Controls

Heading: Technical Efficiency Versus Agency Efficiency – Governance issues in Vertical Mergers
Level: Easy

22. Which of the following is not a benefit of tapered integration?

a) It expands the firm’s input and/or output channels without requiring substantial capital outlays
b) Allows the firm to use information about the cost and profitability of its internal channels to help
negotiate contracts with independent channels
c) Lets the firm motivate its internal channels by threatening to expand outsourcing and, at the same time,
motivate its external channels by threatening to produce more in-house.
d) Allows the firm to produce most efficiently in all circumstances
e) Helps the firm protect itself against holdup by independent input suppliers

Ans: d

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Analytic
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Alternatives to Vertical Integration – Tapered Integration: Make and Buy

Level: Medium

23. For what critical aspect of drug development has research (Azoulay & Henderson) shown that major
drug houses have chosen tapered integration?
a) Clinical Research
b) Drug Development
c) Marketing
d) Sales
e) Manufacturing

Ans: a

Learning Objective: Identify the alternatives to vertical integration

AASCB: Reflective Thinking
AICPA: Resource Management
IMA: Cost Management

Heading: Example 6.4 Tapered Integration in Clinical Research

Level: Medium

24. What type of strategic alliance involves two or more firms creating and together owning a new
independent organization?
a) Partnership
b) Tapered integration
c) Close-knit semi-formal relationship
d) Mutual agreement
e) Joint venture

Ans: e

Learning Objective: Identify the alternatives to vertical integration

AASCB: Reflective Thinking
AICPA: Strategic/Critical Thinking
IMA: Strategic Planning

Heading: Alternatives to Vertical Integration – Strategic Alliances and Joint Ventures

Level: Easy

25. Which of the following is not a benefit that Toys “R” Us gained through its alliance with McDonald’s
Japan?
a) Political know-how
b) Site-selection expertise
c) Changes to Japan’s Large-Scale Retail Store Law requiring MITI approval
d) Business Connections
e) Significant growth on all three major islands

Ans: c

Learning Objective: Discuss evidence that firms adhere to principles in vertical integration
AASCB: Reflective Thinking
AICPA: Legal/Regulatory Perspective
IMA: Business Applications

Heading: Example 6.5 Toys “R” Us Enters Japan

Level: Medium

26. Which of the following features of transactions make those transactions excellent candidates for
alliances?
a) The transaction involves impediments to comprehensive contracting
b) The transaction is complex, not routine.
c) The transaction involves the creation of relationship-specific assets by both parties in the relationship,
and each party to the transaction could hold up the other
d) It is excessively costly for one party to develop all the necessary expertise to carry out all the activities
itself
e) All of the above

Ans: e

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Analytic
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Alternatives to Vertical Integration – Strategic Alliances and Joint Ventures

Level: Easy

27. What Japanese term describes a labyrinth of firms with long-term semi-formal relationships up and
down the vertical chain?
a) Kaizen
b) Keiretsu
c) Kanban
d) Karõshi
e) Mochibun kaisha

Ans: b

Learning Objective: Identify the alternatives to vertical integration

AASCB: Ethics
AICPA: Leadership
IMA: Business applications

Heading: Alternatives to Vertical Integration – Collaborative Relationships

Level: Hard

28. Which of the following is a characteristic of an implicit contract?

a) It is an understanding between parties in a business relationship
b) It is generally enforceable in court
c) The threat of losing future business makes implicit contracts not viable
d) They are typically used in firms that have little relationship with one another
e) It is an alternative agreement method to the Keiretsu understandings between members

Ans: a

Learning Objective: Describe the governance arrangements that can help or hinder integration
AASCB: Ethics
AICPA: Leadership
IMA: Internal Controls

Heading: Alternatives to Vertical Integration – Implicit Contracts and Long-Term Relationships

Level: Medium

29. What term does Uzzi use to describe relationships characterized by trust and a willingness to
exchange closely held information and work together to solve problems?
a) Strategic partnerships
b) Joint ventures
c) Jobbers agreements
d) Embedded ties
e) Strategic alliance

Ans: d

Learning Objective: Describe the governance arrangements that can help or hinder integration
AASCB: Ethics
AICPA: Leadership
IMA: Internal Controls

Heading: Example 6.6 Inter-firm Business Networks in the United States: The women’s Dress Industry
in New York City
Level: Hard

30. Which of the following would reduce co-ordination and hold-up problems?
a) Cost of upstream vertical supplies
b) Manager contracts
c) Required quality of finished product
d) Governance
e) None of the above

Ans: d

Learning Objective: Describe the governance arrangements that can help or hinder integration
AASCB: Ethics
AICPA: Project Management
IMA: Internal Controls

Heading: Governance
Level: Easy

31. Which of the following best describes tapered integration?

a) A manufacturer produces some of all input quantity itself
b) A manufacturer purchases all input quantity from independent firms
c) A manufacturer produces some of an input quantity itself and purchases the remaining portion from
independent firms
d) A manufacturer produces some of all input quantity from its competitors
e) None of the above

Ans: c

Learning Objective: Explain what integration means

AASCB: Reflective Thinking
AICPA: Decision Modeling
IMA: Decision Analysis

Heading: Tapered Integration: Make and Buy

Level: Medium

32. What term describes when a firm is using the least-cost production process?
a) Agency efficiency
b) Matrix purchasing
c) Technical efficiency
d) Economizing
e) All of the above

Ans: c

Learning Objective: Identify the factors in the decision whether to integrate

AASCB: Reflective Thinking
AICPA: Project Management
IMA: Cost Management

Heading: Technical Efficiency versus Agency Efficiency - Economizing

Level: Medium