Multiple Choice Questions
1. Alpha Industries is considering acquiring Foxtrot Flooring. Foxtrot is worth $20 million to its current owners under its existing operational methods. Due to some opportunities for synergies between the two companies, Alpha believes that Foxtrot is worth $25 million as part of Alpha Industries.
What do you predict for a sales price of Foxtrot?
a. Less than $20 million or Alpha will not buy
b. More than $25 million or Foxtrot will not sell
c. Something between $20 and $25 million
d. The different valuations make a sale very unlikely.
2. All of the following provide a motive for vertical agreements EXCEPT
a. Effective execution of price discrimination.
b. Elimination of free-riding among retailers.
c. Quality control.
3. Which of the following is an example of vertical integration?
a. A custom software company purchasing a competing software firm
b. A soft drink producer buying one of its bottling plants
c. A coal manufacturer purchasing a nuclear power plant
d. A gourmet cheese company purchasing a wine maker
4. Why are contact lens manufacturers reluctant to sell their lenses through the Internet?
a. The Internet price is too high due to double marginalization.
b. Search costs are lower, so the Internet sales are too competitive.
c. Doing so reduces the incentives of retailers to provide point-of-sale services.
d. It is afraid of antitrust lawsuits.
5. In which of the following instances would an acquisition make the most sense?
a. The target is a very profitable company.
b. Synergies exist between the acquirer and the target.
c. Integration costs are low between the two.
d. Synergy benefits outweigh the costs of integration.
6. Why do vertical agreements typically pose less antitrust risk than horizontal agreements?
a. Vertical agreements occur less often than horizontal agreements.
b. Vertical agreements often result in lower prices, which is beneficial to the consumer.
c. Vertical agreements are rarely profitable.
d. Vertical agreements do not pose less antitrust risk than horizontal agreements.
7. Giganto Grocery Chain wishes to sell Boldo detergent. Boldo's manufacturer, CPG Industries, will not supply Giganto unless Giganto agrees to carry all of CPG's other detergents. This is an example of
c. Territory restriction.
8. A multinational firm acquires many of its components pre-assembled from suppliers.
One of these suppliers operates in a country with a much lower corporate income tax rate. How does this affect the vertical relationship between this supplier and the multinational?
a. This will not affect the relationship.
b. The multinational should stop working with the supplier.
c. The multinational should consider purchasing this supplier.
d. The multinational should move all its operations to the supplier's home country.
9. In which of the following cases might you expect to find a manufacturer granting exclusive territories?
a. A pet supply chain that requires heavy local advertising to drive sales.
b. Custom computer sales that require a good deal of consultation.
c. A submarine sandwich chain that relies on its nationwide brand reputation.
d. All of the above
10. Britain's beer industry is vertically integrated, from production to distribution, and they even own a large number of their own pubs, which serve branded beer to patrons. The United States, by contrast, has a three-tiered distribution system. The idea is that brewers and distillers, the first tier, have to distribute their product through independent wholesalers, the second tier. And wholesalers, in turn, have to sell only to retailers, the third tier, and not directly to the public. Based on this difference, one might expect
a. Lower consumption in the United States.
b. Higher prices in the United States.
c. Less refrigeration of beer in the United States.
d. All of the above