There are certain situations in which vertical integration (acquiring the firm's buyers or suppliers) becomes a potentially optimal solution to the market failure problem. One of the factors that helps create such a situation is:

 

 

a) Both parties to the transaction calculate the direct and indirect costs of organizing transaction through the market mechanisms to be lower than the costs associated with the vertical integration

 

b) One of the parties to the transaction would have to make a commitment and investment that is tailored specifically to the transaction and cannot be easily reversed or repurposed

 

c) Both parties to the transaction have full and equal access to all the relevant information and knowledge about the transaction, but fail to utilize it because of the fear it would undermine efficiency of the exchange

 

d) The parties to the transaction operate in the industries with markedly different levels of profitability

Answer rating: 100% (QA)

The potentially optimal solution to the market failure problem in vertical integration is b One ... View the full answer