Long-term contracts:
A)are preferable to short-term contracts when there is a minimal need for cooperation.
B)are preferable to vertical integration when it is not feasible to exchange hostages.
C)generally result in lower prices than does competitive bidding.
D)achieve exactly the same outcomes as vertical integration, but they incur higher bureaucratic costs.
E)are a low-cost alternative to vertical integration when it is possible to build cooperative relationships with suppliers.

Question

Quizplus · Accepted Answer

Long-term contracts are a low-cost alternative to vertical integration when it is possible to build cooperative relationships with suppliers. This allows firms to benefit from economies of scale and reduce transaction costs while maintaining flexibility and avoiding the risks associated with vertical integration. Option A is incorrect because long-term contracts are not necessarily preferable when there is a minimal need for cooperation. Option B is incorrect because vertical integration involves owning the supply chain rather than entering into contracts with suppliers. Option C is incorrect because long-term contracts may result in higher prices if the supplier has significant bargaining power. Option D is incorrect because vertical integration involves integrating operations rather than entering into contracts.

Long-Term Contracts