1. 1. Disney Purchase of Capital Cities/ABC Transfer Pricing -- price at which Disney transfers programming to ABC Opportunity Cost Economies of Scale and Scope in program development and advertising Transactions costs/holdup problem -- time and expense of negotiating, writing, and enforcing contracts

2. Coordination of production flows Leakage of private information

3. 2. Effect of falling European trade barriers Larger markets for European firms, enhanced opportunities for achieving economies of scale and scope –spreading of fixed costs –purchasing economies –marketing economies –transportation economies –R&D

4. Effect on competition -- more competition for U.S. and Japan both in Europe and elsewhere Type of industry? –Labor intensive vs. capital intensive –Asset specificity vs economies of scale

5. 3. Poletown Case Background to case –New site needed, Poletown only site in Detroit, heavily settled neighborhood –City, UAW in favor of Poletown, residents opposed –$200 million for Poletown site vs $65-80 million for other site. Stockholders -- fiduciary responsibility –Midwestern alternative

6. Stakeholders -- non-fiduciary, moral responsibility –Includes stockholders, community, employees, customers, alternative community –Likely locate in Poletown Same conclusion –If survival of company at risk –If satisfying stakeholders in best interests of stockholders (increases value)

7. Your choice -- depends on strength of argument

8. 4. GM owns Fisher Body vs tire manufacturer Body panels -- relationship specific –Fundamental transformation, potential for opportunism (holdup problem) Use of Market –More difficult and frequent negotiations –Investment to improve ex post bargaining position –Reduced investment in relationship-specific assets –Distrust

9. Vertical integration –Corporate governance –Repetition of relationship –Internal management power –Lose economies of scale Tire manufacturers -- not relationship specific –Less concern over opportunistic behavior/holdup –Take advantage of economies of scale

10. 5. Patterns in many industries A) Small firms outsource production –Less able to achieve economies of scale and learning economies B) Standardized inputs outsourced, tailor- made not outsourced –Standardized inputs -- less asset specificity Little risk of opportunism -- lower transactions costs More opportunity for economies of scale –Tailor-made -- just the reverse

11. 6. Diversification to diversify managerial risk (Ch 3-5) Agency Considerations -- difficult to measure divisional performance –Product diversification increases agent’s opportunity for hidden information and hidden action (asymmetric information) Risk attached to investment in relationship- specific assets

12. Shareholders spread risk –If shareholder owns large block of stock, can’t sell without affecting stock price –Diversification resulting from internal development reduces risk by reducing asymmetric information –Diversified firms less likely to go bankrupt (all or nothing) –Economies of scope reduce risks

13. 7. Holdup problem related to relationship-specific assets Fundamental transformation with relationship specific assets Opportunity cost -- redeploying a specific asset reduces its value –Quasi-rents can be transferred to trading partner