Question

Identify the three fundamental explanations of how vertical integration can create
value and discuss how value is created under each.

Answer 1

There are three explanations of how firms can create value through vertical integration which is as follows:

opportunism based explanation - value can be created under this if the threat of opportunism is reduced by a firms decision to vertically integrate

firm capability explanation - value can be created if a firm possesses the resources and capabilities in business - then vertical integration would add value

flexibility - value can be added by vertically integrating if a firm has flexibility in an industry with high uncertainty. that way their costs of shifting strategies and methods remains low