Question

Netflix sells video streaming services to its customers. In the last few years it vertically integrated into the video content business by making its own television shows and movies that are exclusively distributed on Netflix. Use ideas developed in this class to discuss the desirability of this vertical integration. Only words written in the box below will be graded.

Answer 1

game by beginning at the end of the game and working backwards.

True

Sometimes players in simultaneous play games can simplify their own decisions by thinking carefully about moves that their opponent will never make.

True

The full cost approach to setting transfer price is chosen by most firms because it always maximizes profit.

False

Setting a transfer price by using the price charged for a similar product produced in an outside-the-firm competitive market is likely to work best when there is a large holdup problem.

False

The profit maximizing amount of effort to get from an employee is determined by the value of that effort to the firm and the dollar value of the unhappiness generated for the employee.

...

Economists recommend that all firms use incentive pay.

...

There is strong incentive to make an ingredient inside your own firm when the only outside firm selling the ingredient is a monopoly.

True

Firms sometimes vertically integrate to protect trade secrets.

True

For the holdup problem to be a significant argument for vertical integration, two things must be true. First, there must be a significant amount of asset specificity and secondly there must be significant uncertainty concerning potential abuses of the buyer's advantage.

True

Externalities can sometimes provide an argument for vertical integration. Often this happens when there is one firm supplying the ingredient and several firms using it. If some of the buyers provide inexpensive, but low quality products this can damage the reputation of the ingredient. Vertical integration is one way to prevent these spillovers from damaging the ability to sell high quality products.

True