Question

You have become the owner-manager of a small local bubble tea seller that has outlets in 10 prime shopping-center locations across Singapore. Given the structure of this market discussed in question 3, you are considering vertical and horizontal integration. Using the theory of the optimal boundary of the firm, discuss the make-or-buy decision as well as the scope for horizontal integration and diversification of your firm. What stages of the vertical chain should you consider conducting inhouse? What other horizontal markets may you integrate into?

Answer 1

Now as a owner-manager of a small local bubble tea seller, have to decide as to whether a tea should be grown &manufactured (having unused installed capacity) or bought from the market. In taking such a ‘make or buy ‘ decision, the marginal cost of the tea and other ingredients should be compared with the market price. If the marginal cost is lower than the market price, the tea should be dhould be manufactured by ourself. However, the we must take into consideration any increase in fixed costs or any Limiting factor which may arise if the production is undertaken in the processing of tea amd ingredients. If the purchase price is lower than the marginal cost and provided regular supply and proper quality of the tea and ingredients are guaranteed by outside supplier, it should be purchased from outside supplier.

Integration of Horizontal markets means merger and acquisition of same lineup segments which may leads to our monopoly in the market.