QL (Quebec Lumber) is a logging and wood processing firm in a remote part of the Canadian province of Quebec. They have recently acquired a remote track of timber that is located ten miles from their processing facility. Normally, this is not a problem as they are able to simply cut the timber and haul it using trucks to their processing facility. However, this track of forestland is ten miles to their north, and there are no roads connecting the tract of land to their facility. They have also acquired a narrow (120 foot wide) ten-mile strip of land connecting this tract of timber to their processing facility. QL considered building their own road between the two points, and have log trucks haul the logs to the processing facility. However, they have decided instead to go with a less expensive option, a narrow gauge railroad. The narrow gauge railroad would require the laying of ties and steel tracks, and will require a custom-built locomotive and rolling stock (train cars that will carry the logs).

While they have settled on the idea that the railroad is the best way to move the logs to the processing facility, they are trying to determine whether to own and operate this railroad themselves (vertically integrate), or instead have an outside firm own and operate the railroad. QL is considering an outside firm because they do not want to make such a large investment themselves up front, and would rather pay an outside firm to transport the logs based on the number they transport over time. Also, QL does

not have any experience operating a railroad, as they have only engaged in cutting down trees and then processing them (turning them into wood boards). Obviously, vertically integrating has some advantages and disadvantages, some of which might be particularly relevant in this situation.

For each of the three ways that vertical integration can be used to increase profitability mentioned in the textbook, discuss to what degree each is relevant in this specific scenario. Also, discuss what degree the three problems with vertical integration discussed in the textbook are relevant to this specific scenario. Based on this analysis, explain whether QL should vertically integrate by owning and operating the narrow gauge railroad themselves, or whether they should not vertically integrate and have an outside firm own and operate it.