ECON 356

In Class Exercise Eight - The Theory of the Firm - The Literature

1.  Explain the difference between the market contract mode and the internalization mode of organizing inputs.

2.  According to Coase -- why would we see vertical integration?

3.  What is the difference between vertical integration, horizontal integration and conglomerate diversification?

4.  What three categories of transaction costs did Dahlman talk about?  Give an example of each.

5.  Explain how uncertainty leads to vertical integration (according to Coase).

6.  Why did Stigler predict that we would see more vertical disintegration in growing markets?

7.  Alchian and Demsetz theorize that firms exist because team production (division and specialization) increases productivity.  So what is their theory -- how does team production lead to the firm (vertical integration)?

8.  What two "behavioral" assumptions do transaction cost economists make?  Define any terms you use.

9.  What is asset specificity?  Give an example.

10.  How and why do the two behavioral assumptions (their existence) and asset specificity lead to vertical integration?