Vertical Integration
A situation where a firm produces the inputs
required to make its final product.
Ex: car manufacturers like Toyota and Honda internally
produce highly specific inputs that must be tailored to
car manufacturer?s particular technical requirement
such as the car engine and transmission.
Works best when:
Transaction costs are high due to specialized investment
When product being purchased is extremely complex, or
the economic environment is plagued by uncertainty that
contract will be costly to write.