Deck 21: Managing Vertical Relationships

Question 1

​Harry's HVAC sells its new units with locked and encrypted servicing software,which only Harry's own service technicians can operate.Why would it want to do that?

A)​To ensure that the customer knows that they are stuck with Harry's service technicians
B)To ensure that Harry's technicians do not service the equipment.
C)To ensure that the customers do not buy second-class servicing and then infer faulty design if a unit breaks down due to inadequate service
D)​All of the above

Answer 1

C

Question 2

​Double markup problems arise when

A)​upstream firms have no market power
B)downstream firms have no market power
C)upstream and downstream products are unrelated in demand
D)​upstream and downstream firm's pricing decisions tend to decrease the demand for the other product          

Answer 2

D

Question 3

​Vertical relationships can increase profits through

A)​preventing firms from evading regulation
B)creating a double-markup problem
C)making the incentives of manufacturers and retailers unaligned
D)​facilitating price discrimination

Answer 3

D

Question 4

​In the problem of double marginalization,the resulting price is ______than if the manufacturer and the retailer were to merge

A)​Higher
B)Lower
C)The same
D)​None of the above

Question 5

​Harry's HVAC sells its new units bundled with after sales service.Why would it want to do that?

A)​To ensure that the customer knows that they are stuck with Harry's service technicians
B)To ensure that only the highest paid personnel get to service the units
C)To ensure that the customers do not buy second-class servicing and then infer faulty design if a unit breaks down due to inadequate service
D)​All of the above

Question 6

​In the problem of double marginalization,the resulting price is ______than if the manufacturer were to sell directly to the consumer

A)​Higher
B)Lower
C)The same
D)​None of the above

Question 7

​The conditions in which vertical relationships can enhance a firm's ability to price discriminate include

A)​the manufacturer's product is of value to just one type of customer
B)the costs of arbitraging the price difference across markets is small
C)the manufacturer acquires the distributer in the higher priced market
D)​competition provides little ability for the manufacturer to price above marginal cost

Question 8

​Mechanisms that manufacturers can use to deal with misaligned retailer incentives include

A)​setting a minimum retail price
B)providing an exclusive contract to a single retailed in a market
C)compensating retailers' sales staff for demonstrating,as well as selling,the product
D)​All of the above

Question 9

​The conditions in which vertical relationships can enhance a firm's ability to price discriminate include

A)​the manufacturer's product is of value to just one type of customer
B)the costs of arbitraging the price difference across markets is large
C)the manufacturer acquires the distributer in the higher priced market
D)​lack of competition provides the manufacturer with the ability to price above marginal cost

Question 10

​Double markup problems arise when

A)​upstream firms have market power
B)downstream firms have no market power
C)upstream and downstream products are unrelated in demand
D)​upstream and downstream firm's pricing decisions tend to increase the demand for the other product

Question 11

​Vertical relationships can increase profits through

A)​preventing firms from evading regulation
B)eliminating a double-markup problem
C)making the incentives of manufacturers and retailers unaligned
D)​preventing price discrimination

Question 12

​The conditions in which vertical relationships can enhance a firm's ability to price discriminate include

A)​the manufacturer's product is of value to multiple types of customers
B)the costs of arbitraging the price difference across markets is large
C)the manufacturer acquires the distributer in the higher priced market
D)​competition provides little ability for the manufacturer to price above marginal cost

Question 13

​Double markup problems arise when

A)​upstream firms have no market power
B)downstream firms have no market power
C)upstream and downstream products are complementary in demand 
D)​upstream and downstream firm's pricing decisions tend to increase the demand for the other product

Question 14

​The problem of "double marginalization" is

A)​The retail price being too low due to an exclusion of both manufacturer and retailer markup
B)The retail price being too high due to an inclusion of manufacturer markup
C)The retail price being too high due to an inclusion of both manufacturer and retailer markup
D)​The retail price being too high due to an exclusion of retailer markup 

Question 15

​The problem of "double marginalization" is

A)​The retail price being too high due to an inclusion of both manufacturer and retailer markup
B)The retail price being too low due to an exclusion of both manufacturer and retailer markup
C)The retail price being too high due to an exclusion of manufacturer markup
D)​The retail price being too low due to an exclusion of retailer markup  

Question 16

​Coco chocolate manufacturers recently decided to "gift" one of its retailers a refrigerator.Why would it want to do that?

A)​To ensure the retailer knowledge of their generosity
B)To ensure the retailers knowledge of their quality
C)To ensure the freshness of the product that reaches their consumers
D)​To ensure the retailers decrease in price

Question 17

​The problem of "double marginalization" is

A)​The retail price being too low due to an absence of both manufacturer and retailer markup
B)The retail price being too high due to the existence of both manufacturer and retailer markup
C)The retail price consisting only of the manufacturer markup
D)​The retail price consisting only of the retailer markup  

Question 18

​Harry's HVAC refuses to sell diagnostic software and spare parts of its heating and cooling systems to third parties.Why would it want to do that?

A)​To ensure that the customer knows that they are stuck with Harry's service technicians
B)To ensure that only the highest paid personnel get to service the units
C)To ensure that the customers do not buy second-class servicing and then infer faulty design if a unit breaks down due to inadequate service
D)​All of the above

Question 19

​The conditions in which vertical relationships can enhance a firm's ability to price discriminate include

A)​the manufacturer's product is of value to just one type of customer
B)the costs of arbitraging the price difference across markets is large
C)the manufacturer acquires the distributer in the lower priced market
D)​competition provides little ability for the manufacturer to price above marginal cost

Question 20

​Vertical relationships can increase profits through

A)​preventing firms from evading regulation
B)creating a double-markup problem
C)better aligning the incentives of manufacturers and retailers
D)​preventing price discrimination

Question 21

​Which of the following is TRUE?

A)​Discount retailers can defeat price discrimination by the manufacturers through arbitrage
B)Arbitrage is not an effective way for retailers to defeat price discrimination by manufacturers
C)Retailers are incapable of defeating upstream price discrimination once the manufacturer sets prices
D)​"High End" retailers can defeat price discrimination by the manufacturers through arbitrage

Question 22

​Vertical contracts between manufacturers and retailers often aim to

A)​Incentivize the retailers to undertake costly activities,which they otherwise may not realize the full benefits of on their own
B)Reward the retailer for undertaking the risk inherent in introducing a new product
C)Reimburse the retailer for the cost of managing an extended inventory
D)​All of the above

Question 23

​In the problem of double marginalization,the resulting price is lower than if

A)​The manufacturer were to sell directly to the consumer
B)The manufacturer and the retailer were to merge
C)All of the above
D)​None of the above

Question 24

​Vertical contracts that aim to decrease retailer prices typically

A)​Benefit the consumer and the manufacturer but hurt the retailer
B)Benefit the manufacturer and retailer but hurt the consumer
C)Benefits the consumers,manufacturers and retailers
D)​Hurts all the manufacturers,consumers and retailers

Question 25

​The various ways that vertical relationships can evade regulation include

A)​tying the sale of a regulated good to a customer's choice of an unregulated good
B)bundling regulated and unregulated goods
C)preventing the exclusion of rival unregulated goods
D)​insuring tax rates are uniform across jurisdictions

Question 26

​Vertical contracts that aim to decrease retailer prices typically

A)​Benefit the consumer and the manufacturer but hurt the retailer
B)Benefit the manufacturer and retailer but hurt the consumer
C)Benefit the retailer and consumer but hurt the manufacturer
D)​Benefit the manufacturer,retailer and consumer

Question 27

​Retailers do not find it profitable to engage in promotional activities because

A)​They cannot reap the full benefits of the promotion
B)They do not have to share the benefits of the promotion with the manufacturer
C)They are unaware of competing retailers' ability to "free ride" on their efforts
D)​All of the above

Question 28

​Vertical contracts between manufacturers and retailers often aim to

A)​Serve as a "signal" of the manufacturer's belief of the likely success of his product
B)Reward the retailer for undertaking the risk inherent in introducing a new product
C)Reimburse the retailer for the cost of managing an extended inventory
D)​All of the above

Question 29

​Retailers do not find it profitable to engage in promotional activities because

A)​They reap the full benefits of the promotion
B)They do not have to share the benefits of the promotion with the manufacturer
C)They are wary of competing retailers' ability to "free ride" on their efforts
D)​All of the above

Question 30

​Which of the following can increase customer awareness?

A)​Advertising
B)Promotional activities
C)Service
D)​All of the above

Question 31

​The manufacturer has put in place a price discrimination policy,where it charges its household customers more per unit than it charges its industrial users.The manufacturer wants to keep the retailer from arbitraging away the profits from the policy.The manufacturer should

A)​Vertically integrate into the retail operations in the household market
B)Vertically integrate into the retail operations in the industrial market
C)Reward the household market retailers for not arbitraging
D)​All of the above

Question 32

​Which of the following can be a solution to the "free riding problem" by discount retailers?

A)​Awarding retailers exclusive territories
B)Setting minimum prices for items sold by such specialty retailers
C)All of the above
D)​None of the above

Question 33

​Vertical contracts aim to

A)​Incentivize the manufacturers to undertake costly activities,which they may not realize the full benefits of on their own
B)Incentivize the retailers to undertake costly activities,which they may not realize the full benefits of on their own
C)Incentivize the retailer and the manufacturer to undertake activities that reduce profits for the supply chain
D)​Both A&B

Question 34

​In the problem of double marginalization,the resulting price is higher than if

A)​The manufacturer were to sell directly to the consumer
B)The manufacturer and the retailer were to merge
C)All of the above
D)​None of the above

Question 35

​Retailers often do not find it profitable to engage in promotional activities because

A)​They cannot reap the full benefits of the promotion
B)They have to share the benefits of the promotion with the manufacturer
C)They are wary of competing retailers' ability to "free ride" on their efforts
D)​All of the above

Question 36

​Which of the following can increase customer interest?

A)​Advertising
B)Promotional activities
C)Service
D)​All of the above

Question 37

​Vertical contracts that aim to decrease retailer prices typically

A)​Benefits the consumers,manufacturers and retailers
B)Hurts all the manufacturers,consumers and retailers
C)Benefit the manufacturer,hurt the consumer and retailer
D)​Benefit the retailer,hurt the manufacturer and consumer

Question 38

​Vertical contracts between manufacturers and retailers often aim to

A)​Incentivize the retailers to undertake costly activities,which they otherwise may not realize the full benefits of on their own
B)Serve as a "signal" of the manufacturer's belief of the likely success of his product
C)Reimburse the retailer for the cost of managing an extended inventory
D)​All of the above

Question 39

​Vertical contracts that aim to decrease retailer prices typically

A)​Benefit the consumer,hurt the manufacturer and the retailer
B)Benefit the manufacturer,hurt the consumer and retailer
C)Benefits the consumers,manufacturers and retailers
D)​Hurts all the manufacturers,consumers and retailers

Question 40

​Retailers do not find it profitable to engage in promotional activities because

A)​They reap the full benefits of the promotion
B)They have to share the benefits of the promotion with the manufacturer
C)They are unaware of competing retailers' ability to "free ride" on their efforts
D)​All of the above

Question 41

​Vertical contracts between manufacturers and retailers often aim to

A)​Incentivize the retailers to undertake costly activities,which they otherwise may not realize the full benefits of on their own
B)Reward the retailer for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the manufacturer's belief of the likely success of his product
D)​All of the above

Question 42

​An employer faces a higher minimum wage control where it cannot pay its workers any less than $10.25 an hour.The employer may react by

A)​Doing nothing-it cannot violate the regulation
B)Offering the employees fewer fringe benefits
C)Increasing spending on workplace amenities
D)​Hiring additional workers

Question 43

​An employer faces a minimum wage control where it cannot pay its workers any less than $10.25 an hour.The employer knows that the workers value the jobs and are willing to work even at much less.The employer decides to offer them the minimum wage but forces them to buy their uniforms from the employer.This is an example of

A)​Tying
B)Bundling
C)Exclusion
D)​Fraud

Question 44

​An employer faces a minimum wage control where it cannot pay its workers any less than $10.25 an hour.The employer knows that the workers value the jobs and are willing to work even at much less.The employer decides to offer them the minimum wage,but successfully stops other sellers of work uniform from sell uniforms to its workers so that he can charge more for the ones he sells.This is an example of

A)​Tying
B)Bundling
C)Exclusion
D)​Fraud

Question 45

​Vertical contracts between manufacturers and retailers often aim to

A)​Prevent the retailers from defeating upstream price discrimination through arbitrage
B)Reward the retailer for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the manufacturer's belief of the likely success of his product
D)​All of the above

Question 46

​Vertical contracts between manufacturers and retailers often aim to

A)​Incentivize the manufacturers to undertake costly activities,which they otherwise may not realize the full benefits of on their own
B)Reward the manufacturers for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the manufacturer's belief of the likely success of his product
D)​All of the above

Question 47

​A pharmaceutical company faces a price regulation where it cannot charge any higher than $5,000 for a lifesaving drug.The company knows that the patients put a high value on this product and are willing to pay up to $10,000 for it.The company decides to sell the drug at $5,000 and receives another $5,000 from administration through their exclusive medical service providers.This is an example of

A)​Tying
B)Bundling
C)Exclusion
D)​Fraud,the company is not allowed to sell for any higher than the regulatory price

Question 48

​Vertical integration can sometimes be used to

A)​Avoid paying higher taxes
B)Reward the retailer for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the manufacturer's belief of the likely success of his product
D)​All of the above

Question 49

​The management of a rental building faces a rent control situation,where it cannot charge more than $400 a month in rent on the apartment.The management knows that the apartments are high in demand and renters would be willing to be $1000 per month for them.The management will

A)​Do nothing-it cannot violate the regulation
B)Offer a bundle of both the apartment and furniture together for $1000
C)Offer the controlled rent but force the tenants to rent furniture from the management
D)​Both B&C

Question 50

​Vertical contracts between manufacturers and retailers often aim to

A)​Incentivize the manufacturer to undertake costly activities,which they otherwise may not realize the full benefits of on their own
B)Reward the retailer for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the retailer's belief of the likely success of his product
D)​All of the above

Question 51

​A pharmaceutical company faces a price regulation where it cannot charge any higher than $5,000 for a lifesaving drug.The company knows that the patients put a high value on this product and are willing to pay up to $10,000 for it.The company decides to sell the drug at $5,000 but requires the patients to purchase periodic blood testing from them for $5,000.This is an example of

A)​Tying
B)Bundling
C)Fraud,the company is not allowed to sell for any higher than the regulatory price
D)​Both A&B

Question 52

​A pharmaceutical company faces a price regulation where it cannot charge any higher than $5,000 for a lifesaving drug.The company knows that the patients put a high value on this product and are willing to pay up to $10,000 for it.The company will likely

A)​Not do anything-it is prohibited by law to increase its price
B)Bundle the drug with periodic blood testing,selling the bundle for $10,000
C)Require that the patients have the drug administered by the company's medical staff,for an additional $5,000
D)​Both B&C

Question 53

​Vertical contracts between manufacturers and retailers often aim to

A)​Prevent the manufacturers from upstream price discrimination
B)Reward the manufacturer for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the manufacturer's belief of the likely success of his product
D)​All of the above

Question 54

​Vertical integration often aims to

A)​Prevent the retailers from defeating upstream price discrimination through arbitrage
B)Avoid paying higher taxes
C)Serve as a "signal" of the manufacturer's belief of the likely success of his product
D)​All of the above

Question 55

​Vertical integration often aims to

A)​Prevent the retailers from defeating upstream price discrimination through arbitrage
B)Reward the retailer for undertaking the risk inherent in introducing a new product
C)Avoid paying higher taxes
D)​All of the above

Question 56

​Vertical contracts between manufacturers and retailers often aim to

A)​Prevent the manufacturer from upstream price discrimination
B)Reward the retailer for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the retailer's belief of the likely success of his product
D)​All of the above

Question 57

​The management of a rental building faces a rent control situation,where it cannot charge more than $400 a month in rent on the apartment.The management knows that the apartments are high in demand and renters would be willing to be $1000 per month for them.The management decides to only offer the furniture and apartment together for rent.This is an example of

A)​Tying
B)Bundling
C)Exclusion
D)​Fraud

Question 58

​Vertical contracts between manufacturers and retailers often aim to

A)​Incentivize the retailers to undertake costly activities,which they otherwise may not realize the full benefits of on their own
B)Reward the manufacturer for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the retailer's belief of the likely success of his product
D)​All of the above

Question 59

​A pharmaceutical company faces a price regulation where it cannot charge any higher than $5,000 for a lifesaving drug.The company knows that the patients put a high value on this product and are willing to pay up to $10,000 for it.The company decides to sell the drug together with periodic blood testing for $10,000.This is an example of

A)​Tying
B)Bundling
C)Fraud,the company is not allowed to sell for any higher than the regulatory pric
D)​Both A&B

Question 60

​Vertical contracts between manufacturers and retailers often aim to

A)​Prevent the retailers from defeating upstream price discrimination through arbitrage
B)Reward the manufacturer for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the retailer's belief of the likely success of his product
D)​All of the above

Question 61

​If your supplier becomes more profitable

A)​you become more profitable by acquiring it
B)you become less profitable by acquiring it
C)acquiring it will make you more profitable if there are no synergies to exploit
D)​unless there are synergies to exploit through acquisition,acquiring it will not make you more profitable

Question 62

​Vertical contracts often result in

A)​Higher prices
B)Lower prices
C)Unchanged prices
D)​None of the above

Question 63

​Acquiring a supplier because it becomes more profitable

A)​will raise the asking price to offset any increase in cash flow over time
B)will increase your profits
C)will decrease your profits
D)​will make you alter operations

Question 64

​Antitrust risks from vertical integration are usually ______than those from horizontal integration

A)​Higher
B)Lower
C)About the same as
D)​None of the above

Question 65

​Horizontal contracts generally run ______the goals of the customers

A)​Indifferent to
B)In line with
C)Contrary to
D)​None of the above

Question 66

​Horizontal contracts often

A)​Increase competition between substitute products
B)Eliminate competition between substitute products
C)Do not change the competition between substitute products
D)​None of the above

Question 67

​Purchasing a profitable supplier increases profit only if

A)​You pay equal to the value of the company's inventory
B)You pay higher than the value of the company's future profits
C)You pay lower than the value of the company's discounted future profits
D)​You pay lower than the value of the company's undiscounted future profits

Question 68

​Vertical contracts can also be seen as

A)​An increase in coordination between firms producing complementary goods
B)An increase in competition among firms producing complementary goods
C)An increase in coordination between firms producing substitute goods
D)​An increase in competition between firms producing substitute goods

Question 69

​Vertical contracts generally run ______the goals of the customers

A)​Indifferent to
B)In line with
C)Contrary to
D)​None of the above

Question 70

​Antitrust enforcement of vertical relationships is generally focused on

A)​The dominant firm using vertical contracts to extend market power to other levels of the supply chain
B)Vertical contracts that increase the intensity of competition
C)Vertical contracts that help consumers
D)​All of the above

Question 71

​Horizontal contracts often result in

A)​Higher prices
B)Lower prices
C)Unchanged prices
D)​None of the above

Question 72

​An acquisition will not be profitable

A)​In any circumstances
B)As long as you paid lower than the company's discounted future profits
C)Without a synergy that makes the company more valuable to you than to the current owner
D)​None of the above

Question 73

​Antitrust enforcement of vertical relationships is generally focused on

A)​The dominant firm using horizontal contracts to extend market power to other levels of the supply chain
B)Vertical contracts reducing the intensity of competition
C)Vertical contracts that help consumers
D)​All of the above

Question 74

​Purchasing a profitable supplier increases profits only if

A)​You pay equal to the company's discounted future profits
B)You pay higher than the company's discounted future profits
C)You pay lower than the company's discounted future profits
D)​None of the above

Question 75

​Antitrust enforcement of vertical relationships is generally focused on

A)​The dominant firm using horizontal contracts to extend market power to other levels of the supply chain
B)Vertical contracts increasing the intensity of competition
C)Vertical contracts that harm consumers
D)​All of the above

Question 76

​Which of the following is TRUE?

A)​Purchase a supplier as long as the supplier is profitable
B)Purchasing a profitable customer would lead to an increase in profits
C)Purchasing a profitable supplier may not necessarily increase your profits
D)​Purchasing a profitable supplier is a bad idea and would lead to decreased profits

Question 77

​Tee-shirt Integration
Tee-shirt Titan produces a variety of lines of "ironic" designs that it sells nationwide.It also sells plain tee-shirts in a variety of colors to smaller local silkscreen shops.It noticed that one of these,Shasta Shirtwerkz,has experienced substantial growth and profitability due to its even more clever designs.Should Tee-shirt Titan purchase Shasta Shirtwerkz as another line within their product offerings?

Question 78

​The management of a rental building faces a rent control situation,where it cannot charge more than $400 a month in rent on the apartment.The management knows that the apartments are high in demand and renters would be willing to be $1000 per month for them.The management decides to offer controlled rent but force the tenants to rent furniture from them.This is an example of

A)​Tying
B)Bundling
C)Exclusion
D)​Fraud

Question 79

​The management of a rental building faces a rent control situation,where it cannot charge more than $400 a month in rent on the apartment.The management knows that the apartments are high in demand and renters would be willing to be $1000 per month for them.The management decides to offer the controlled rent,rents furniture to its tenants,but successfully bars delivery from competing furniture stores.This is an example of

A)​Tying
B)Bundling
C)Exclusion
D)​Fraud

Question 80

​Antitrust enforcement of vertical relationships is generally focused on

A)​The dominant firm using vertical contracts to extend market power to other levels of the supply chain
B)Vertical contracts that reduce the intensity of competition
C)Vertical contracts that harm consumers
D)​All of the above