If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?
A) Divisions that produce parts for other divisions have effective monopoly power, so the outcome for these division must be inefficient.
B) This outcome is no longer possible in the U.S. after passage of the Sarbanes-Oxley law.
C) Vertically integrated firms are often subject to antitrust investigations, so managers routinely limit the amount of information that flows between divisions.
D) Managers in some divisions may not have information about production capacities or costs in related divisions.

Question

Quizplus · Accepted Answer

Even though all the divisions are owned by the same company, managers in some divisions may not have information about production capacities or costs in related divisions. This lack of information can lead to inefficient decision-making, such as overproduction in one division and underproduction in another. As a result, asymmetric information problems can still arise in vertically integrated firms despite ownership by a single company.

If All of the Divisions in a Vertically Integrated Firm