Homework for Chapter 3 (adapted from end-of-chapter questions) 10 points possible
3. TWC creates and distributes entertainment throughout the world. Miramax is part of the conglomerate, Colony Capital and Qatar Holding, which creates movies, among other products. By virtue of a contract, TWC has exclusive rights to distribute Miramax movies in the U.S., the largest market (in terms of revenue). TWC uses its monopsony power to pay a lower price for Miramax movies than do other distributors. Is this sufficient justification for Colony Capital and Qatar Holding to buy out TWC? Explain. (1 point)
This is not sufficient justification. It certainly is an avenue to consider, however, the only way to truly justify purchasing TWC is to weigh the other option available which is to start their own distribution company. If the cost of starting their own distribution company teamed with a higher cost to distribute the movies brings in a higher revenue than the cost of purchasing TWC teamed with distributing the movies at a lower cost than it would be better to start their own distribution company and vice versa.
4. In each of the following situations, why are firms likely to benefit from vertical integration? (1 point each)
a. A grain elevator is located at the terminus of a rail line. Owning grain elevator(s) is beneficial to the rail line because it allows the rail line more control over the grain elevator which in turn allows for more efficient planning and stream lined logistics as oppose to attempting to plan along with a separate company.
b. A manufacturer of a product with a national brand-name reputation uses distributors that arrange for advertising and promotional activities in local markets.
Vertical integration in this respect can allow the company to gain valuable insight into the markets and in learning what they want through advertising and promoting can turn around and update their product or create new products to meet the various...
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