Question

In a vertically integrated firm, if the relative importance of administrative and transaction costs shifts from one to the other, what could the firm do? Answer by first explaining what is a vertically integrated firm.

Answer 1

In vertical integration, a firm expands its operations into different steps. There is multiple departments of operations in the organisation.

If the relative importance of administrative and transaction cost shifts from one to another, the firm realises that current market cost it is incurring is higher than the transaction cost from market form of organisation. In such a scenario, the firm would disintegrate and outsource it's operations to other companies.