1. McDonalds and P_amp;G selling in different nations

							 1. McDonald’s and P&G selling
      in different nations
• Selling different products
  – Lose production economies of scale
     •   Spreading fixed costs
     •   Purchasing economies
     •   Transportation economies
     •   Inventories
• Brand names
  – McDonald’s -- same brand name, take
    advantage of umbrella branding
     • Consumers infer product quality from brand name
  – Procter and Gamble -- different brand names,
    unable to take advantage of umbrella branding
            2. Poletown case
• Background to case
  – New site needed, Poletown only site in Detroit,
    heavily populated
  – City, UAW in favor of Poletown, residents
    opposed
  – $200 million for Poletown site vs $65-80
    million for alternative site
• Stockholders -- fiduciary responsibility
  – Midwestern alternative
• Stakeholders -- non-fiduciary, moral
  responsibility
  – Includes stockholders, community, employees,
    suppliers, alternative community, customers
     • Likely locate in Poletown
• Same conclusion
  – If survival of company at risk
  – If satisfying stakeholders in best interests of
    stockholders (increases value)
• Your choice -- depends on strength of
  argument
  3. Dixieland Bottlers/Big Dog
• Transfer pricing -- Big Dog better off if it
  acquires Dixieland and can increase price
  that Dixieland pays?
• Opportunity cost -- best use of Big Dog’s
  Resources?
• Vertical integration vs. market transaction
  – Vertical integration
     • Reduce transactions costs (but already lifetime
       contract)
     • Increase coordination
     • Reduce leakage of private information
  – Market transaction
     • Reduce agency costs
     • Reduce influence costs
• Although Dixieland pays less for Big Dog
  products, market share same as nationwide
     4. Developing Countries’
    Demand for Specific Assets
• Increase demand for specific assets, more
  vertical integration
  – Underdeveloped court system and contract law
  – Economies of scale
  5. Patterns in many industries
• A) Small firms outsource production
  – Less able to achieve economies of scale and
    learning economies
• B) Standardized inputs outsourced, tailor-
  made not outsourced
  – Standardized inputs -- less asset specificity
     • Little risk of opportunism -- lower transactions costs
     • More opportunity for economies of scale
  – Tailor-made -- just the reverse
   6. Diversification to diversify
      managerial risk (Ch 3-5)
• Agency considerations -- difficult to
  measure divisional performance
  – Product diversification increases agent’s
    opportunity for hidden information and hidden
    action (asymmetric information)
• Risk attached to investment in relationship-
  specific assets
• Shareholders spread risk
  – If shareholder owns large block of stock, can’t
    sell without affecting stock price
  – Diversification resulting from internal
    development reduces risk by reducing
    asymmetric information
  – Diversified firms less likely to go bankrupt (all
    or nothing)
  – Economies of scope reduce risk
   7. Holdup problem related to
    relationship-specific assets
• Fundamental transformation with
  relationship-specific assets
• Opportunity cost -- redeploying a specific
  asset reduces its value
  – Quasi-rents can be transferred to trading partner