A ﬁrm that faces a hold-up problem for an input will grow vertically along the vertical chain as _____.
A) the ﬁrm can exploit economies of scope
B) few ﬁrms will be willing to supply the input to the market
C) the ﬁrm will face a single buyer for its ﬁnal product
D) the demand for the ﬁrm's goods will be inelastic

Question

Quizplus · Accepted Answer

The hold-up problem occurs when a firm relies on a specific supplier for an essential input, and that supplier has the power to exploit the situation, for example, by raising prices. This can make it difficult for other firms to enter the market as suppliers of that input, leading the original firm to integrate vertically to secure its supply chain and mitigate the risk of being exploited. Vertical integration allows the firm to control more of its supply chain, reducing dependency on external suppliers and thus addressing the hold-up problem.

A ﬁRm That Faces a Hold-Up Problem for an Input