If an important component of a firm's production is difficult to specify in a contract and even more difficult to enforce in its production standards, then it probably makes sense to:
A) buy the component in the open market.
B) use a simple short term contract.
C) vertically integrate upstream to build the component.
D) take the risks necessary to buy the component.

Question

Quizplus · Accepted Answer

Vertically integrating upstream to build the component is the best choice in this case as it ensures greater control over the production process and reduces the risks of non-compliance or poor quality. It may be more costly in the short term, but it provides long-term benefits and a competitive advantage over outsourcing the component. Buying the component in the open market or taking the risks necessary to buy the component may lead to inconsistent quality and supply chain disruptions. Using a simple short-term contract may not provide enough control over the production process and quality assurance.

If an Important Component of a Firm's Production Is Difficult